Are Invoice Auction Marketplaces on Life Support? Post 1

The idea of creating an electronic auction marketplace for investors to purchase assets (in this case invoices, or future dated cash flows), was novel back in 2007 when The Receivables Exchange designed an invoice auction exchange for single or multiple invoices that were not credit enhanced. Sellers of invoices set the parameters (minimums, 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 was an alternative to factoring for single or multiple invoices.

invoice

Figure: Conceptual Example of an Electronic Marketplace

Where are we Today?

There certainly have been tremendous changes since the formation of the The Receivables Exchange back in 2008 to develop a marketplace for small business invoices. When NYSE Euronext acquired a minority stake in The Receivables Exchange back in 2011, the business was split in two, one focused on a “Corporate Receivables Program ” program that targets sellers in the Fortune 1000 and the original small business “SMB” program. The SMB program did a venture with Ariba to generate volume that never materialized. It proved difficult to scale the small business model and it was shuttered. (I have written about the reasons why here and here.)

Today, the platform is purely for large corporates and as of Jan. 1, 2016, has been rebranded LiquidX. It has been recapitalized and no longer has ICE or the former NYSE as an equity partner.

In the U.K., you have both Platform Black and MarketInvoice. Platform Black started its first auction on June 2012 and by June 2013 was processing close to £3.2M weekly. Since June 2012, the platform has processed about £125m and has run more than 2,600 auctions. Its SME Invoice Trading product enables a company to receive up to 90% of the face value of the invoice and there is recourse on the supplier if the buyer does not pay. SMEs can finance their invoices up to 90 days. The product has evolved: no set up fee, no exit fee and no non-utilization fees. Also it has now put a security trust in place so a debenture or a personal guarantee can be taken before the seller can trade, though this isn’t always required.

MarketInvoice is a U.K.-based invoice financing company that launched in 2011 and has funded more than £670 million to date. It uses a proprietary underwriting model to group its loans into 10 risk-based price grades. Its biggest supporter is the U.K. government, which buys invoices through MarketInvoice as part of the British Business Bank initiative. Recently MarketInvoice released its loan book for public consumption.

Aztec Exchange also offered a global marketplace for export finance and had registered over 200 suppliers to sell invoices on its platform since going live in June 2013 but has recently done a pivot and moved away from that model.

Tomorrow we will look at why these invoice auctions have struggled and how they are pivoting.

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Voices (4)

  1. A Frank Lender:

    I just saw this posting as I something made me think about The Receivable Exchange . I had met them when they were starting out and attended a few networking events etc. Back then I ran a small $25MM real estate lending fund and also would also put liens on Receivables so there were possible synergies.
    TREX were good smart guys/women, but I’m not overly surprised as to their semi-demise because I have never been convinced how well the funding “exchanges” model will ultimately work. Private lending/factoring etc. is all about finding quality deal flow via delivering on what you promise and pricing; solid due dil and legal protect your investment and with discipline and hard hard you should nearly always win: the upside is limited to the interest rates so you cannot lose or your overall returns are smoked. Loans are investments, not commodities, and you should manage the hell out of them like a VC partner manages his investments. And Infrastructure has be at a minimum.
    (My old industry is now inundated with “lending funds” who have huge back offices that “underwrite” and approve pretty terrible loans; I never understood how throwing more “monkeys” at a complex process decreases risk…and I fear most lending funds are waiting for an economic downturn to blame their shitty deals on)
    The underlying financing play of these exchanges definitely makes sense for the “buyers”, and that lures in the VCs. However, in the case of TREX I noticed it was largely small receivable factoring guys looking for more deal flow, not many new “Receivable investors”. Ultimately, the exchange model of turning a financing business on its side, and then trying to make private lending a software play which then would have to generate the IRR necessary to repay the kind of returns VCs want by only skimming pennies and nickels off of projected volume… I think that’s an incredibly hard win for VC type investors.

  2. Glenn Blackman:

    The fact that this type of transactional invoice finance has become available has benefited some customers (37% have told our surveys that they want selective finance) and it has caused many of the mainstream providers to offer more flexible contracts and terms to customers which has been a positive change for the better.

  3. Paul Jolley:

    A quick search indicates Platform Black no longer exists (now Sancus Finance) and Market Invoice announced recently they are looking to diversify into Trade Finance, (presume supply chain and import stock funding), it would appear these solution platforms are struggling.

    As a Business facing advisor the key issue has been that the speed of response has not matched the marketing messages. Back end underwriting and onerous initial trade limits set on the class of Debtor traded meant the solution was not truly available to a the majority of credit worthy SME’s who have seen their Bank overdrafts reduced or withdrawn for reasons that are nothing to do with their trading history or position.

    Very interested to read your conclusions in Post 2?

    TY PJ

  4. Kevin:

    David, thanks for posting. Regarding the SME side of the Receivables Exchange, it was a scaling issue but more about the operating model and environmental factors than the ability to gain interest. People were very interested in avoiding a factoring scenario, so they sought this option. Migrating interest from factoring was a strength due to the reputation and previous experiences with factoring.The model breaks down in operations where turnaround time was slow due to the manual diligence process on the backend. You also have organic factors like churn where funding is just not needed ongoing or repetitively.

    I do believe the SME opportunity is still one that can work. Key success factors would be automating more of the diligence work on the backend AND adding to your key offerings. If the receivables auction model doesn’t fit a potential customer, have more options to help them with the financing option that is right for them. All easier said than done, but it is a pivot, as you say, that could take the business to its next phase.

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