Across Europe, governments are mandating the use of electronic invoices in a bid to improve tax oversight and revenues. Could this shift also yield significant benefits for SME borrowers, finance providers and technology platforms? Felix Thompson reports.
Despite growing digitalisation efforts within cross-border trade, many importers continue to receive invoices in paper or PDF format when buying goods from abroad. Accounts payables departments are largely wedded to age-old processes: collecting, reviewing and feeding invoice data into back-office systems.
“We work with a large European industrial company which has over a million invoices a year, around a quarter of which are still issued in paper form,” says Peddy Hashemi, global head of customer success at working capital management platform SAP Taulia.
But soon, European businesses may be forced to ditch these practices as governments across the continent introduce laws to bring invoicing into the 21st century.
In March, the European Council adopted a package of regulations – known as VAT in the Digital Age (ViDA) – which will require e-invoicing for B2B transactions within the bloc by 2030.
E-invoices are typically issued in a structured format, such as XML, and differ from PDF invoices sent by email – an approach that has become increasingly popular in recent years, but still requires manual reconciliation.
Several nations, including France, Germany and Italy, have already passed legislation in a bid to help cut business costs and boost tax revenues. According to European Commission estimates, ViDA will also reduce VAT fraud by €11bn annually over the next decade.
The UK also conducted a consultation from February to May this year on the possibility of creating an e-invoicing system, with the aim of boosting business productivity and reducing tax errors. HM Revenue & Customs (HMRC) is currently reviewing feedback from stakeholders, after which government ministers will determine the overall policy direction.
As the shift towards clear government guidelines gathers pace, there are hopes that e-invoicing could also significantly improve access to trade finance for SMEs.
E-invoicing could be a “game changer” for the supply chain finance (SCF) market in particular, says a 2024 report prepared by think tank the Centre for European Policy Studies and accountancy firm EY, pointing to products such as factoring and dynamic discounting.
The paper, published by the EU Payment Observatory, a European Commission initiative that monitors payment trends and delays across European businesses, says e-invoicing will “significantly reduce” costs for SCF providers by helping them manage larger invoice volumes, offering them “efficiency gains”.
Providers may also see a rise in client numbers as SMEs shift away from paper-based invoicing and embrace platforms offering tax, invoice and financing solutions in one place, potentially resulting in “reduced fees”.
“As a consequence, the appeal of such financing products may grow for companies, in particular for SMEs,” it says. “Incoming e-invoicing mandates, whether they come from ViDA or are nationally based, will multiply the possibilities for supply chain finance.”
Likewise, banks and fintechs active in the space believe that e-invoicing policies could help drive growth in financing activity in the coming years.
“It will improve visibility across the cycle: from the time a purchase order is raised to when it moves to invoice realisation,” says NLN Swaroop, global product head for sustainable trade finance, innovation, financial institutions, capital management and asset distribution within HSBC’s Global Trade Solutions business.
He tells GTR: “At all stages of the transaction, pre-shipment, inventory and post-shipment, you could have digital finance solutions being developed based on structured data being available in a more seamless manner.”
Hashemi at SAP Taulia touts the introduction of mandatory legislation as a significant development for the sector, offering opportunities to technology platforms.
“E-invoicing is experiencing significant growth on the back of government initiatives aimed at enhancing compliance and reducing fraud,” he says.
“For solution providers, it is important that our solutions are compliant with the regulations coming in – whether it be in Germany, France, Spain, as well as markets in Eastern Europe, such as Poland.”
SAP is among a group of software providers that offer e-invoicing solutions, alongside firms such as Tradeshift, the Tungsten Network and Pagero.
SME benefits
While tax benefits are the core focus of e-invoice efforts across Europe, the shift is expected to offer significant benefits to SMEs.
In its report, the EU Payment Observatory says e-invoicing has the potential to slash processing times by reducing mistakes in the preparation and receiving of invoices, while also removing the need to use physical couriers.
Hashemi at SAP Taulia argues that a more streamlined approval process could boost access to payables financing.
“A key driver for the adoption of supply chain finance is the acceleration window: the payment terms for a supplier minus the time it takes for a buyer to approve an invoice,” he says.
“If you’re a supplier on 90-day terms and your customer takes 45 days to approve an invoice, you have an acceleration window of 45 days to take early payments,” he tells GTR, adding large corporates often have quite complex systems and approval processes.
E-invoicing could reduce processing times to just 10 days, thereby widening this acceleration window significantly, he says.
“There would be an additional 35 days for a supplier to secure early payment. In terms of value, that is huge.”
Companies would also have real-time visibility of payables and receivables, allowing them to better track their financing needs, Hashemi says.
“With paper, like with cash, it is difficult to track and forecast; to understand how many invoices are being processed daily. With electronic invoicing in place, it is much easier to understand where you are with payables and receivables, so it will be easier to forecast cash flows – and quickly understand your cash flow gap.”
According to Hashemi, many companies do not grasp they have a cash flow gap until it’s too late.
“E-invoicing will mean SMEs and mid-market firms will quickly realise whether they have enough cash for payroll to pay their own suppliers and for day-to-day operations. This allows for improved decision-making and it will be clearer whether they should turn to working capital management solutions.”
Such views are echoed by HSBC’s Swaroop, who says it can be “very difficult” to combine invoice data manually.
A company may have hundreds of invoices from debtors with different payment terms, geographies and taxation rates, says Swaroop, who also serves as a board member of the International Trade & Forfaiting Association (ITFA).
But “if you have this information in a structured and consistent format, then your ability to manage taxation payments or your days sales outstanding is much improved”, he tells GTR.
“The availability of data creates transparency, and that makes decisioning easier” for potential borrowers as well.
Mitigating risk
By shedding light on invoice data, e-invoicing could give financial institutions the confidence they need to ramp up lending to SMEs.
The EU Payment Observatory report says e-invoicing can reduce the risk faced by lenders when managing large numbers of invoices.
“The increased transparency brought by e-invoicing and the generation of more standardised data on transactions helps to ensure the authenticity and creditworthiness of invoices. For instance, the use of electronic invoicing can provide a factoring company with a clearer view of the transaction history of companies when taking up new invoices,” it notes.
“This facilitates their assessment of the invoice payment likelihood and the potential timeline for its payment,” it adds.
Outside of Europe, there is evidence of this potential.
Neal Harm, Secretary General of factoring industry association FCI, says Latin America is by far the “most advanced” region for e-invoicing, and this trend has correlated with a significant rise in factoring.
Initially, countries such as Chile and Mexico developed e-invoicing guidance “to remove the risk of someone creating a €100,000 invoice and then billing €1mn to evade tax”, he tells GTR.
But the shift has also helped to mitigate fraud risks for factoring providers, and in doing so boosted financing for SMEs, Harm says.
He points to Chile, which in 2001 became the first country to introduce a voluntary e-invoicing system. The government later mandated the use of electronic invoices, rolling it out in stages and integrating it with a central invoice registry managed by the Chilean tax administration, Servicio de Impuestos Internos (SII).
Today, all invoice transfers between borrowers and financiers must be recorded in the state registry. While many factoring transactions are completed before being reported, the registry also functions like a factoring marketplace, enabling companies to list their receivables for potential financiers.
“Chile has one of the more developed factoring industries in the world, which has become a widespread solution among SMEs,” says the EU Payment Observatory report, citing figures from Chile’s tax authority.
The value of electronic tax documents transferred – effectively factored invoices – in the country reached Ch$46tn last year, up from Ch$13tn a decade earlier, data from the SII shows.
“The real driver of this change [in Chile] was tax,” Harm says. “But the financial institutions realised: ‘Hey wait a minute, I now have a centralised point where all receivables are being captured’. They now have visibility and can tell the rest of the world ‘I’m the owner of the invoice’, so there’s no duplicate financing.”
Differing systems
Despite the potential advantages for both SMEs and lenders, European policymakers are still debating the most suitable approach to e-invoicing. A key question is whether to adopt a centralised model – as seen in much of Latin America, where governments operate national platforms – or a decentralised model, like the one embraced by Singapore, which relies on a network of certified service providers.
Rachel Stirrat, HMRC’s e-invoicing policy and external stakeholder lead, suggests the UK will likely develop an approach that leans on multiple e-invoicing platforms rather than a single government interface.
“We are currently leaning towards decentralised models, which is the same direction Europe seems to be moving to,” she said in an ITFA interview published in May.
“Creating a centralised system that caters for all sectors could be challenging – and may not be needed given there is a competitive private market developing which can provide platforms for e-invoicing that may be better suited to each industry. We are hopeful that by being a late adopter, we can get a lot more information to help us get to where we want to be.”
Major banks suggest e-invoicing will yield benefits, regardless of the approach.
“As a financial institution, there’s no preference one way or the other. Our view would be to move ahead with whichever model provides more efficiency for clients, saves time, works consistently and creates scale without additional friction being created,” says HSBC’s Swaroop.
But for some experts, e-invoice frameworks must be accompanied by additional measures geared towards financial institutions.
FCI’s Harm argues that governments should require granular transaction data when companies submit e-invoices.
“For example, mandating product codes so lenders can see whether a white coffee cup is being sold, versus a gallon jug,” he says. “If you know this detail, you know the value of the invoice.”
E-invoice laws should also be accompanied by national or regional trade registries that indicate whether a bank already holds ownership of a given invoice, he says.
Such registries have already been developed in a few jurisdictions, including Singapore, India and the UAE, helping to reduce fraud risks for lenders by flagging whether an invoice may already have been financed.
“There needs to be a marker in the system, so you know the invoice is owned or pledged to a specific financial institution,” Harm says, adding: “There is still some work to do from that perspective.”
