Invoice trading now allows customers to utilise the best aspects of invoice finance to their advantage. It could be a potential game changer for cash flow solutions.
A brief history of Invoice Finance
Invoice finance (including invoice factoring and invoice discounting) has remained a popular form of lending since its first appearance in Mesopotamia over two thousand years ago. Then the Romans started using it through a system of promissory notes, and just a few hundred years ago, most of the world’s exploration (and exploitation) was financed through bankers lending in anticipation of returns from New World wealth.
In more recent times, invoice factoring became a staple bank offering, providing fixed terms in return for acting as the accounts payable department of individual business. Since the banking crisis this rigid type of invoice finance has been tempered by a growth in popularity of more flexible forms of invoice finance including variable types of selective invoice finance.
Increasing the variety of existing Invoice Finance options
Invoice finance was once an option for businesses experiencing short or long term cash flow problems, and for businesses subject to lengthy payment terms. Now there are a growing number of invoice finance packages that allow companies to use it alongside their growth planning.
There are already plenty of different invoice finance options from invoice factoring, selective invoice finance, invoice discounting and confidential invoice discounting. And while these offer a more flexible way of extending credit in return for ownership of unpaid invoices the invoice finance industry still hasn’t stopped developing.
The benefits and flexibility of selective invoice finance has seen it become an even quicker form of access to cash liquidity without any of the contractual tie-ins, while simultaneously embracing free market economics AND introducing the financial might of individual and corporate peer to peer investors.
Invoice Trading Platforms
Invoice trading platforms (also called peer to peer invoice trading or invoice auctions) is a combination of invoice finance and peer-to-peer lending where a trading platform is set up allowing businesses to sell their invoices to online investors.
This form of auction financing where finance providers bid to advance money to SMEs based on their unpaid invoices is largely made up of institutional investors, hedge funds, asset managers, and wealthy individuals. And for the last three years the UK government has provided investment too.
When a business chooses to sell its invoices on a platform they don’t need to commit either all of their invoices or be placed on a lengthy contract. They can trade one or more invoices at the same time depending on what their present cash needs are.
One of the big benefits is that they don’t have to offer personal guarantees or fixed charges on either the sales ledger or their assets. The increased flexibility is that for the business taking on invoice finance through a trading platform there is usually no contracts longer than the invoice itself, no monthly fees and no personal guarantees.
The big advantage of using an online trading platform is the speed of the transaction without being forced into any long-standing contract or having to discount your entire debtor book. Which allows a certain level of control over your cash flow.
How Trading Platforms Operate
1. Invoices are uploaded to the platform and verified by the platform operator. Sellers then set what percentage of their invoice they are wishing to sell and what price they are prepared to accept for it.
2. The invoice is then auctioned off to live bidders, who are also vetted and approved by the platform. The bidder who offers the highest price wins the invoice.
3. The agreed price is then forwarded through the platform to the seller’s separate client account.
4. The invoice is then paid to the seller as is any unsold part of the invoice. And any fees to the platform operator and the interest and fees to the finance provider are settled.
Are trading platforms good for sellers?
Online trading platforms are attractive to sellers as they represent an alternative source to the banks (who are not attractive to SMEs) and to Invoice Factoring companies who require lengthy tie-in periods and rigid terms.
Trading platforms then allow a business to utilise the platform when cash or liquidity is needed. Because of the absence of contractual terms, where there maybe debentures on other assets, it offers a favourable source of funding.
The invoice trading model is distinctive in it matches checked and verified invoices to those with cash wealth looking to fund them and secure a good return on their holdings. It is estimated that there is over £100 billion of family wealth money in the UK alone, which means there is a good appetite for funding quality invoices. In turn this allows businesses to access cash to ease their liquidity.
Invoice trading has generated the interest it has because of the potential for SMEs to have a much greater control over their debtor book as well as accessing finance at a rate that matches what traditional financing would but often chooses not to extend to them.
Most invoice platform operators stress that this is an option for any company offering B2B services and generating gross turnover in excess of £225,000, which makes it an inclusive option for the majority of small, medium and large enterprises in the UK.
