Are Invoice Auction Marketplaces on Life Support? Post 2

Invoice auctions were a novel and innovative idea a few years back.

From a seller’s perspective, auctions provide liquidity, a form of ad hoc, transactional finance. The timing, amount and type of invoices sold through the auction process are driven by the seller. This is certainly a great feature, particularly as the need for cash increases if orders increase or the service business grows. That can be an awesome feature when there is a need for cash, and unlike factoring or invoice discounting lines, there are no annual or set up fees being paid when not used and the business is not reliant on one specific funder. In fact, unlike factoring, which must cover the operation costs of monitoring and collecting receivables, auction pricing should be cheaper.

Still, there are several challenges from a seller’s perspective when selling receivables via an auction process:

  • First, it can be expensive. Fees for money can run 2% month, plus platform fees of 1% over 30 days. Since these platforms are not gaining in funding spread since they offer no balance sheet, fees must support the business model.
  • Second, what the seller does not know is whether the invoice will get financed six months from now or a year from now. It is not a contractual form of finance like a loan.
  • Third, lending organizations such as factors may threaten to sue sellers who have extended credit to the business and now find the business selling those same receivables that are being used for collateral.
  • Finally, this type of finance tends to be “Blue Chip” finance, meaning sellers can auction invoices from recognized names, but when it comes to obligors that are unknown, private and hard to get data about, it is difficult.

There are also several challenges from an investor’s perspective:

  • The first has to do with volume, or lack of deal flow. Most auctions are still relatively tiny compared with investor interest.
  • It may be difficult to authenticate small business invoices, and even though exchanges may have recourse rights back to the seller, there can be instances of invoice value inflation or outright fraud.
  • Bid Process is “eBay like.” Depending on the auction mechanics, bidding for invoices like eBay is not a fun process. No investor wants to be glued to his screen hoping to get the winning bid.
  • What verification comes from the buyer/obligor? Since there is not credit enhancement on these invoices, having information to verify the invoice back to the purchase order is important. Unlike e-invoicing or supplier networks, exchanges suffer from the problem of information asynchronicity, meaning there is limited counterparty relationship data showing the spend history between seller members and their customers (e.g., length of trading relationship, dilution, when paid versus due date).
  • Given low volume, returns can suffer. Returns from auctions can suffer from too much money chasing too few deals, bidding down the price. Collectively, Platform Black and MarketInvoice are doing roughly £25 million month. One major investor could buy the whole lot.

 This is not to say that auction markets will not be successful. But creating a market is very difficult. You have to satisfy both the seller and the investor while ensuring the service provider can make a profit. It can be done, but no one said it would be easy.

So Why the Pivot?

Many of the early companies involved have looked to evolve their product set. In the case of LiquidX, it has overhauled the legal structure governing participation in the marketplace, expanded the asset class capability and added new management.

In Platform Black’s case, it has a Supply Chain Finance Trading Product with a particular focus on the construction sector. The main contractor is allowing its suppliers to have access to the Platform Black platform. As invoices are accepted, the invoices can financed with a promissory note from the buyer. MarketInvoice just turned five earlier this year and continues to plod ahead with the original invoice auction model.

It will be interesting to monitor how these innovators evolve their product portfolio’s to stay relevant.

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First Voice

  1. Paul Crayston:

    One for Betteridge’s law of headlines: “Any headline that ends in a question mark can be answered by the word no”.

    There are inaccuracies in the article. Here are some examples: MarketInvoice dropped the ‘auction’ model years ago in place of a fixed price model with automatic bidding available (and used by nearly all of our investors). Our fast growth in lending volumes has been well documented elsewhere and can be verified by downloading our loanbook here: http://info.marketinvoice.com/loanbook. The vast majority of invoices on MarketInvoice are verified directly by the end debtor.

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