Why investors are reluctant to finance invoices on Supplier Networks

Michael J. Clain is a lawyer with Windels Marx Lane & Mittendorf, LLP and works in their financial services practice.

Supplier networks are ready to partner up with liquidity providers (investors) to finance the billions of invoices that float across their platforms each year. But to attract interest from investors they have to figure out how to eliminate three types of risks:

  1. Receivables Title and Transfer Risk. The business of facilitating e-invoicing doesn’t require knowing whether the supplier has sold the invoice to a factor or pledged it to a lender. It also doesn’t require understanding how to transfer that receivable under the laws of the jurisdiction in which the supplier is located. But no investor will consider purchasing a receivable unless it has confidence that at the end of the day it will hold good and marketable title to it, free and clear of any liens.
  2. Dilution Risk.  Supplier networks have generally asked investors to consider purchasing invoices before they have been approved by the buyer, requiring them to accept the dilution risk (including, for instance, the risk of dispute as to the goods or services covered by the invoice, the risk that the buyer may take a discount for prior dealings with the supplier, and, at a very basic level, the risk that the invoice is fraudulent). Most investors have no relationship with the suppliers whose invoices they are asked to finance, and would not be willing to accept those risks.
  3. Payment Delay and Direction Risk.  Supplier networks generally handle invoice submissions, not payments. They have no mechanism for ensuring that the buyer pays the invoice when due or that it pays the investor who purchased it (rather than the supplier or its lender).

Some of these risks could be eliminated relatively easily – for instance, dilution risk could be eliminated by offering investors only invoices that have been approved by the buyer, much like accounts payable financing programs do. Others may require material changes in the networks’ agreements with buyers – for instance, payment delay and direction risk could be reduced by requiring buyers to allow the networks to handle invoice payments, again taking a page out of accounts payable financing programs. Receivables title and transfer risk may be the most difficult to eliminate, because it requires due diligence on a multitude of suppliers and, in the case of international supply chains, it may require gaining familiarity with the laws of a number of countries. Both title and transfer risk could be eliminated relatively inexpensively by arranging for investors to pay invoices at a discount rather than purchase them (see Will Trade Payable Finance programs move downstream?), but doing so would cause reclassification of the debt on the buyer’s balance sheet, which may be unacceptable to buyers with publicly-registered securities and buyers whose loan agreements may be breached by the incurrence of additional short-term debt.

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