Crowdfunding, which brings together alternative investors to raise finance for SMEs. is making its mark in both supply chain and invoice finance. There are now a number of platform providers in the UK and Europe that offer online marketplaces through which invoices can be sold to non-bank investors. Liz Salecka speaks to some of the leading players.
Chief sales and marketing officer and co-founder, Platform Black
Platform Black offers both invoice trading services directly to SMEs and supply chain finance to corporate buyers seeking to extend payment terms with their suppliers without impeding their financial positions. Outstanding invoices are auctioned via the platform to non-bank investors who compete to drive down the cost of providing finance. Funds are then transferred by the winning bidders, minus fees, via Platform Black to the invoice originators. When the invoices become due, the investors receive payment in full. Platform Black has facilitated £37mn of supply chain and invoice finance to date, and anticipates transactions of £20mn a month by the end of 2014.
Sweden’s Fakturabörsen launched its invoice exchange service in February 2011 for trading in SME invoices. The company, which also applies the “auction model” to invoice trades has facilitated more than SEK400mn in transaction volumes so far, and is projecting SEK500mn to 1bn of transactions during 2014. It secured investment from Schibsted Media Group in 2013, and now has plans to expand its services in Europe, and move into supply chain finance.
Head of partnerships, MarketInvoice
Since its launch in 2011, MarketInvoice has facilitated more than £110mn of invoice finance for UK SMEs. The platform, which applies a fixed pricing model to invoice trades (as opposed to invoice auctioning), anticipates generating £12mn per month in transactions this year. The British Business Bank started investing in invoices traded via the platform in August 2013 and is expected to put £40mn of funding through by August this year.
GTR: What has brought about the need for independent, crowdfunded platform-based facilitators of supply chain finance and invoice finance?
Last: Our existence stems from the fact that UK SME suppliers are being squeezed on both sides – by banks that are retrenching from this sector and debtors that are looking to extend payment terms. This has had a huge impact on smaller companies’ cashflows.
Beaumont: When it comes to supply chain finance, traditional bank-delivered programmes typically only reach the top 2% of a buyer’s supply chain, the largest suppliers in the chain. Online solution providers which rely on crowdfunding can reach much deeper into a buyer’s supply chain and provide financing services to all their suppliers.
Bicer: Before our launch, the Swedish market for invoice discounting was totally messed up, with financing companies – not traditional banks – offering invoice discounting at outrageous prices. These finance companies are not allowed on our platform and instead we attract investment from hedge funds, investment companies and institutional investors.
GTR: Could online marketplaces become seen as a popular alternative to bank-delivered supply chain finance and invoice finance facilities?
Bicer: Yes, they could and this is due to our faster execution and innovation as well as increased transparency into pricing and availability. This type of solution is available to more clients than traditional supply chain finance and other bank credit solutions. In Sweden, supply chain finance is largely made available to the biggest corporates, which have existing relationships with banks, not smaller and medium-sized buyers, which also may want access to this option.
Beaumont: The services we offer are complimentary to those delivered by banks. For large buyers, one of the biggest barriers to bank solutions is the cost – there are finance costs, IT costs, legal costs and other administration costs. Bank-driven supply chain finance programmes can also take a long time to roll out, and we are talking about one year to 18 months. Online platforms like Platform Black can deliver these services at zero-cost to the buyer within minimum timescales and also reach right to the bottom of their supply chains (the smallest suppliers). While we can meet the needs of large global buyers, we can also service buyers at the lower end of the scale with turnovers of £50mn-plus.
Last: About 80% of the companies using our service did not do any type of invoice finance before, and many of them see our platform as an alternative form of mainstream funding to overdraft or debt facilities, for example. We may take business away from traditional providers, but there is huge potential for growth in this market– and we are growing the market. In many cases, we pair up with banks to offer our solution to SME customers, which may have reached their funding limits with that bank, so in that sense we are offering a complimentary service.
GTR: What are the advantages and disadvantages for suppliers that access supply chain finance or
invoice financing in this way?
Beaumont: We offer both invoice finance and supply chain finance via the same platform so suppliers can choose to access one or the other. They have total control over how they use our service, the amounts they raise, and what they pay. Lower cost is a major advantage because, with our service, institutional investors and high net worth individuals participate in auctions and compete down the cost of the finance. Traditional invoice finance offered by banks is quite different in that there are always a range of associated fees, including upfront fees for just using that service. Banks also place concentration limits on the amount of finance that can be accessed in relation to any one debtor, and a ceiling on the size of the facility itself.
Bicer: Our platform is 30 to 50% cheaper a year than traditional invoice discounting here in Sweden, and offers both a faster application process and faster release of funds (24 hours). However, the mainstream business media in Sweden and other parts of Europe are still familiar with this type of financing so a disadvantage could be that it is not yet fully accepted. This will certainly change in two to five years time.
Last: Traditional invoice finance has a lot of pain points including that it is inflexible in nature, can be expensive, and there is lack of transparency into the costs. With our platform, there is no lock-in and companies can pick and choose the invoices they want to sell. There is also a speed element to our service and we do not require personal guarantees.
GTR: How does the technology compare?
Bicer: The technology is not revolutionary in any way, but platform providers are often faster and more innovative in bringing new solutions to the market than the traditional banks and finance industry.
Beaumont: We can get people up and running on our online platform in about 20 minutes or even less, and also offer online training, which is cost-free. One of the problems with traditional supply chain finance solutions is that they can require a lot of IT implementation and can incur high training costs.
Last: We have created our own online technology platform, which offers a really simple process for registration that takes only 15 to 20 minutes. When trading their first set of invoices, SMEs can also ask for support from a dedicated member of our sales team and this can be provided on a face-to-face basis.
GTR: How is this type of finance taking off in different regions of the world?
Bicer: In the US and UK it has taken off really well as would be expected due to the size of these markets. However, in 2014 we do expect to see five to 10 new players entering into European markets such as Denmark, Germany and Slovenia. Emerging markets in Eastern Europe also present opportunities. We, with the backing of Schibsted Media Group, plan to expand into Norway first, and then potentially into France and Spain.
Beaumont: The UK is very innovative and at the forefront of the next big wave in supply chain finance. Platform Black is focusing on organisations based in the UK and Europe, where the difficulties many smaller companies face in accessing finance are similar. There are no limitations to growth. There is real interest from institutional investors who are keen to invest sums of £5mn to £20mn and above in this way.
GTR: What types of investors are attracted to this type of financing?
Beaumont: They are always either institutional investors or high-net-worth-individuals who are sophisticated in their approach and understand the risk-rated returns. They are attracted to the 10% annualised-return this investment typically offers, and also consider this an asset class which they understand well and that is both open and transparent.
Last: One of our key investors now is the British Business Bank, which has been set up by the UK government to channel funding into the SME sector via non-bank channels. Other investor groups include asset managers, hedge funds and high-net-worth-individuals. This is a very liquid market in which demand is outstripping supply. It is also a very low-risk investment with only a 0.05% risk of loss, is short-term (40 to 45 days), and also offers transparency.
Bicer: We attract hedge funds, investment companies and institutional investors who are looking for decent returns and moderate risk. Through our platform, this has now become possible – they do not need to start their own factoring
GTR: Are there any governance issues or risks that must be considered?
Bicer: Money-laundering risks and fraud are governance issues that must be monitored by the platform. We have to guard against the possibility of a company selling invoices, while having some sort of understanding with the debtor that the invoice will not be paid. Risks of late payment or default, however, must be considered by the investor.
Beaumont: Every time an investor looks at a transaction, they can see all the parameters, such as the rate of return, how long the money will be lent for, and who the end debtor is. They are also provided with information on the credit scoring of both the end debtor and the beneficiaries.
The Financial Conduct Authority is bringing in new regulations to govern equity finance and loans arranged using crowdfunding, and this is largely to protect the retail end of the market. Supply chain finance arranged this way does not attract consumers as investors.
Although invoice finance is unregulated, this is as much the case for banks as anyone else. However, it is always a good idea for investors to check that the platform provider they engage with is a member of the Asset Based Finance Association.
Last: It is recommended that investors conduct due diligence on the platform providers they use. They also need to consider the reputability of the SMEs trading invoices, and here we take a prudent approach to the companies using our platform. Before invoices go on online, we also make sure they are verified by the debtor. Factoring and invoice finance are not regulated industries, but we are not opposed to regulation as it can achieve a number of things including providing added comfort to end investors and restricting the emergence of cowboy operators.