Seller Based Invoice Marketplaces – To Sell or Not To Sell? Part IV

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Post four on Electronic Invoice Marketplaces looks at benefits and challenges of buying assets on an invoice auction market.

Investors in exchange auctions can come from several categories:

  • Banks (both small community banks to large global or regional banks)
  • Commercial finance companies (asset based lenders and factors)
  • Asset Managers managing money for Family Offices, Endowment Funds, etc.
  • High Net Worth Individuals

If Investors (or their asset managers) can overcome the fact they must bid for assets (eg. eBay style auctions are not fun), there are several advantages to an auction system. For one, it can allow you to diversify your portfolio at a lower cost than originating assets yourself. You can dial up or down your positions based on your requirements. Second, pricing is transparent and may provide access to short term asset class at better yields than other alternatives.

For example, looking at indicative yield comparisons between other short term alternatives, you find the following Yield versus Term:

Relative Comparison of Short Term Investment Alternatives

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Why Comparing Other Short Term Assets is like Apples versus Walnuts

Using the above graph to compare relative returns is only one dimension. In order to have a sophisticated comparison with an investor, it’s important to understand why there is such a yield differential.

  1. First, receivables bought on auctions are held to term, so if you are buying a 90 day receivable, it stays on your books for 90 days.  As of today, there are no options for a secondary market. That of course is not the case with Treasuries and Commercial Paper.
  2. Second, Commercial Paper typically has standby letter of credit facilities to backstop the paper. This causes them to have an additional cost.
  3. Third, receivables suffer from fraud, dilution, and potential buyer insolvency risk. U.S. Treasuries and commercial paper do not.
  4. Fourth, most of these receivables coming from MarketInvoice and Platform Black are from small companies that would be rated as a high internal risk by an financial institution.

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

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