Electronic Invoice Marketplaces – To Sell or Not To Sell? Part I

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This post on Electronic Invoice Marketplaces kicks off Trade Financing Matters six part series.

Auction-based invoice finance has generated considerable interest within the finance industry because it provides new opportunities for companies to find alternative sources of liquidity and it also provides new opportunities for institutional investors to invest in short term receivables at attractive yields. The Receivables Exchange (“TRE”), established in 2007, was the first real-time online marketplace for working capital financing. Since that time, invoice auction markets have been started in many countries. MarketInvoice and Platform Black have displayed growth since launching in early 2011 and 2012 respectively.

In our six-part series, we will look at the following:

  1. What are Electronic Invoice Marketplaces?
  2. How do they work?
  3. Who are the parties to an Invoice Exchange and what are their Roles?
  4. Investors and Benefits to Buying Assets an Exchange
  5. Benefits and limitations of Auction-based finance
  6. Market size and Current Players.
  7. Summary and Conclusions

What are Electronic Marketplaces

Electronic invoice marketplaces are internet-based platforms over which commercial receivables are actively traded through auction by and among buyers (“Investors”) and sellers (“Issuers”) using a third party platform to enable the auction.

The first online marketplace where small businesses can auction invoices began in 2007. The current size of the market is extremely small relative to receivables outstanding, and each vendor operates a platform within their domestic market. The U.K. has seen several vendor offerings with online auction capabilities in reaction to the Governments push for more proactive small and middle market (“SME”) lending.

Invoice Marketplaces versus Factoring and Invoice Discounting

Exchanges provide an alternative liquidity option for sellers for single, non credit enhanced invoices. Any business should compare options to liquidate receivables if they need financing. Factoring and invoice discounting are two finance techniques that have been used by companies for a long time. Both are well-established sources for trade receivable finance using receivables of a business as collateral for early payment.

Factoring consists of several distinct services: receivables monitoring and collection, credit assessment, payment guarantees and financing. It is operationally intensive to monitor and collect receivables, and normally focuses on small to mid market sellers who are in labor intensive industries (footwear, apparel, furniture, etc. suppliers selling to larger retail buyers). Where a credit customer fails to pay, the precise form of agreement between the factor and the client business will determine which party incurs the loss.

Invoice discounting is also a form short-term financing where the trade receivables are used as security and, amounts advanced are normally higher than factoring since the invoice discounter does not administer the credit sales of a business.

Receivable exchanges are a single invoice, non credit enhanced exchange where sellers of invoices set the parameters (minimum advance accepted, advance rates, etc.) and Investors, known as Buyers (including banks, hedge funds, asset-based lenders, and family offices) compete in real time to purchase them. The concept is to be an alternative liquidity source both to factoring and invoice discounting for SMEs.

In contrast to factoring and invoice discounting agreements, using receivable auctions has several advantages:

  • Sellers are not tied down by exclusivity agreements
  • There are also no requirements for personal guarantees or for the SME to issue debentures to secure the finance needed.
  • Sellers are not dependent on one lender, but via a network of investors. By having access to many investors, the risk that finance will be withdrawn is reduced.
  • Selling invoices on auction platforms can be adhoc on an as needed basis, so fees are not incurred by having lines and credit agreements.

If you are interested in a more detailed review on Electronic Invoice Marketplaces – To Sell or Not To Sell? and the players, please visit here.

Voices (4)

  1. Nicky:

    Thanks for the post!

  2. Bree:

    Great post. I, myself, am a huge fan of invoice factoring for my small business. I use http://www.corefundcapital.com and they work well for me, they might work well for someone out here, too.

  3. David Gustin:

    Hi Fred,

    Your solution is not an invoice auction marketplace such as what TheReceivablesExchange, MarketInvoice, Platform Black and others are doing but factoring and invoice discounting. I think Factors like yourself have inherent regulatory and compliance advantages over traditional banks yet still get your funding primarily through them. Your model is seller focused, relationship oriented but will be challenged by the erosion of receivables from different buy side business models. See posts I did recently

    http://spendmatters.com/tfmatters/erosion-receivables-growing-problem-asset-based-lenders/ and here http://spendmatters.com/tfmatters/collateral-lenders-relationships-new-data-driven-underwriting-models/

    cheers

    David

  4. Fred:

    Hi David,

    I am happy to see an article on Invoice Marketplaces. I don’t think there is enough awareness of these unique business funding products and the advantages they provide especially to new and growing businesses.

    My company has been providing invoice factoring / invoice discounting services in Canada for over 14 years. The funding product we have come up with combines the benefits of both these products into, what we believe is a more advanced business financing product. It’s positioned us really well within the Canadian market. I’d love to hear your thoughts on our accounts receivable factoring product (see link below).

    http://www.expressbusinessfunding.ca/financing-solutions/invoice-discounting/

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