20 May 2021
The financial crisis of 2008 and the resulting reluctance of banks have led individuals and companies to turn to alternative financing solutions. As a result, today’s financial managers have access to many solutions to manage their cash flow outside the traditional financial channels. Invoice trading is one of these alternative solutions. Although this option is still little known, its potential is no less impressive. Let’s take a look at it.
Invoice trading is a process in which a company borrows money from an investor through unpaid or overdue invoices. The invoices then serve as a guarantee of payment. This alternative financing solution is based on Invoice Trading platforms, which allow companies to sell their invoices to an online community of investors.
The Invoice Trading platform connects companies with cash flow problems with investors looking for short-term investments. The investors are generally investment funds that pay in advance the invoices assigned to the platform to receive the interest associated with the deferrals. In line with peer-to-peer lending, this process allows companies to generate cash flow through an alternative financing solution, outside the traditional banking model.
This system can be used by companies of all sizes, when they want to improve their cash flow quickly and without being tied to a contract, that can be the case with traditional factoring contracts. Businesses establish a relationship with invoice marketplaces when they are looking to improve their capital. This alternative solution also allows them to generate cash that can then be used to improve their short-term liquidity, pay expenses, or even make new investments necessary for their operations. For some companies, Invoice Trading is very interesting as it frees up cash flow. Maintaining working capital and managing growing demand is not easy, especially for SMEs. In the case of customers with long payment terms or payment conditions of 60 or 90 days, Invoice Trading allows the company to invest without delay.
Invoice Trading involves 3 entities:
The classic Invoice Trading process is relatively straightforward, particularly because the platform acts as a trusted intermediary.
While the main advantage of Invoice Trading for companies is quick access to liquidity to meet cash flow needs, there are many other advantages. First of all, this alternative financing solution is quick and easy to set up, entirely online. Second, it offers total control and flexibility. Companies sell invoices only when they deem it necessary, choosing the invoices concerned and, consequently, the debtors involved. Invoice Trading also guarantees the confidentiality of companies. In most cases, the debtors will not be notified of the company’s action, which does not affect their business relationship. Secondly, as the investors on invoice marketplaces are generally international, foreign invoices can be financed easily. The final advantage for companies is that no collateral assets are required.
The invoice marketplace is also very interesting for investors. This process allows them to achieve very good returns on investment by diversifying their financing. Unlike other types of loans, this one integrates an invoice as a guarantee, which limits the disappointments and brings a certain peace of mind to the investors.
Invoice trading is currently only the smallest segment of alternative financing solutions. However, it is the fastest-growing method, especially in Italy and Spain. The potential of this alternative solution is indeed impressive, especially considering the volume of invoices due on the market.
Invoice trading regulations vary greatly from one country to another. If you have a project, do not hesitate to contact us to learn how we can support the implementation and management of your financial flows!
*For outgoing payments made to eligible banks, which include this service.
