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

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Post five on Electronic Invoice Marketplaces looks at both the Investor and Seller downsides to invoice auction markets

There are several challenges when buying receivables via an auction process:

  1. The first has to do with volume, or lack of deal flow. Most auctions are still relatively tiny compared to investor interest.
  2. Given low volume, returns can suffer. Talking to investors in the past, the returns from auctions were roughly half the level from when they first started.  In essence, besides not having enough deals, there was too much money chasing too few deals and bidding down the price.
  3. It may be difficult to authenticate seller invoices, and even though exchanges have recourse rights back to the seller, there can be instances of invoice value inflation or outright fraud.
  4. 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 seller networks, exchanges suffer from the problem of information asynchronicity. Meaning there is limited counterparty relationship data showing the spend history and sourcing TRE seller members and their customers (e.g.. length of trading relationship, dilution, when paid v. due date).
  5. If Bid Process is “eBay like”:   if the auction mechanics are structured like a eBay bidding system (ie, you can submit multiple bids over time as opposed to only one), that creates a time intensive process. No one wants to be glued to their screen hoping to get the winning bid.

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.

Seller limitations of Auction-based finance

From a seller’s perspective, this liquidity option is just that, a form of adhoc, 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. And 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.

But there are downsides to auctions.

  • First, what the seller does not know is will my invoice get financed 6 months from now, or a year from now? It is not a contractual form of finance like a loan.
  • Second, lending organizations 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.
  • Third, this type of finance tends to be what I call “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.

Let’s face it. Unlike approved invoice finance, where the funder (or Investor to use consistent terminology) is taking obligor or buyer risk, with auction finance, that is not the case. When the buyer or obligor does not pay the amount owed, the seller is still liable and so must repay the investor.

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.


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