Invoice trading has become established as a modern method for businesses to improve cash flow and boost working capital. This type of finance appears to have proved particularly suited to smaller companies which may not own any major assets of their own, but often have a debtor book that carries with it a commercial value in the market place. In particular, it is a practical way for young companies to use the reputation and standing of their customers to gain access to finance at a realistic cost.
A further attraction is the fact that funding of this type avoids the need for smaller company owners to give the onerous personal guarantees that usually come as part and parcel of a standard bank loan or overdraft. In a nutshell, companies that normally wait 30, 60 or even 120 days to be paid for work that has already been delivered, can offer for sale one or more of their invoices to investors via one of the P2P invoice trading platforms. In return for accepting a discount on the total amount owed, the company can receive the majority of its cash straight away. Meanwhile, investors who buy such invoices at the discounted rate wait until the full term is due to receive the full amount – the difference between the two amounts providing the expected profit element, or investment return. Thus the cash-strapped company receives the money earlier than it otherwise would have done and the investor aims to make a healthy return.
Market Invoice, one of the earliest platforms of this type and the current UK market leader, which has raised over £300 million since its inception in 2011 (according to its website), bears testimony to the need and popularity of invoice trading. The entrepreneurs behind invoice trading have actually taken the concept a stage further through the development of what is known as ‘Supply Chain Finance’ – a cost efficient way for even the largest companies to support and strengthen their supply chain without compromising their own financial status. It is a way for the money locked up in long supply chains – such as occur in the manufacturing, automotive, electronics and retail industries, for example – to be released. In brief, the supplier sends in its invoice in the usual fashion to the customer which ‘approves’ the invoice, but doesn’t actually pay it. The invoice acquires a value that can be traded on one of the invoice trading platforms. If the supplier decides to trade one or more of the ‘approved’ invoices it will receive the money in return for a small discount. As before, the buyer of the invoice is due to receive the full amount after the full term has run its course. Thus the large company at the top of the chain has extended the payment period to its supplier(s) without any additional cost to itself while, at the same time, it has used its financial muscle to help its suppliers receive money early. Crucially, the smaller company has not had to approach a traditional bank for any money; therefore it has incurred no debt and has not had to provide personal guarantees.
The process is fast, efficient, transparent (no hidden charges) and relatively low cost. At its most sophisticated, invoice discounting can be used by major corporations to strengthen their supply chain while helping to protect their own financial situation. However, while this all sounds fine, there is risk attached to such transactions and things can still go wrong. Pledged funds may not turn up on time, may be reduced or, if the company due to pay goes bust, then perhaps the money may not turn up at all. In the event of liquidation, any money owing to creditors may be delayed for months or even years and will almost certainly be reduced when pay day does eventually come around. And, of course, when things turn ugly there is also plenty of room for time-consuming and costly litigation. This is not to sound ‘doom and gloom’ – merely to caution that, whatever anyone says, these are speculative investments that carry an element of risk.
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