Invoice trading is a term well-known to major corporations and entrepreneurs. It’s a less conventional strategy for controlling money flow. Invoice trading essentially helps businesses of all shapes and sizes avoid lengthy lock-in periods by cashing out unpaid invoices easily. It resolves the entire debtor ledger.

Invoice trading graph

The value of transactions on trading platforms, a subsector of the global finance industry, increased rapidly throughout Europe (excluding the UK) between 2013 and 2020. In 2020, the total value of all trading service transactions topped USD 2 billion.

So, in this blog post, we will explain what it is and the different platforms.

What is Invoice Trading?

A corporation may borrow money from an investor in the form of unpaid or past-due invoices via this practice. After that, the invoices act as an assurance that they will be paid without any hidden fees and avoid lengthy lock-in periods. These Trading platforms are the foundation of this alternative financing option and companies sell their unpaid invoices for quick access to cash. Workable cash is one of the main advantages of this system.

Online trading makes it possible for businesses to sell their outstanding bills to a network of investors located online.

Companies having trouble with their cash flow may connect with investors searching for short-term investments via the trading platform.

In most cases, the investors are investment funds, and they are the ones that pay the bills that have been allocated to the platform in advance to obtain the interest that is linked with the deferrals.

Like peer-to-peer lending, this method enables businesses to produce cash flow using an alternative financing option outside of the framework of the conventional banking system.

So, we hope that you have grasped this concept. Now that we know what it is let us move forward to “How it works?”

How Does Invoice Trading Work?

Marketplace platforms link businesses struggling with working capital with investors looking for quick investments.

Peer-to-peer financing, invoice finance, and invoice discounting are the main alternative names that are sometimes used. Now that you know the ins and outs of this term, let’s take a look at how it works:

First, a company has to submit its application online and then wait for a member of this platform to provide permission. After the application has been reviewed and accepted, a client bank account will be established, and the company will then be able to begin selling outstanding invoices via the invoice trading platforms.

Before being put up for sale, each invoice is put through a computerized verification process on these invoice trading platforms. Investors can purchase either the entire invoice or a portion of it.

Within 24 to 48 hours, an advance payment of 90% of the invoice amount will be deposited into the company’s account.

After the creditor has paid their invoice and the customer has confirmed receipt of the payment in their bank account, the platform will release the remaining amount to the company, less applicable fees.

Well, what’s the point of believing in us without proof? Here is another smart stat:

Invoice trading chart

This chart displays the relative significance of the various factors that led fundraisers to choose it in the UK in 2014, as reported by respondents to a study on the country’s alternative finance industry. Seventy-one percent of respondents at the time cited “speed” as the primary reason.

Invoice Trading Works as Finance Options for Small and Medium-Sized Enterprises

Businesses often use this trick to increase their working capital and free up cash for short-term liquidity, expense payment, and investment in business expansion.

To avoid this, many businesses, particularly those catering to more prominent clients, offer their wares and services on credit, with payment due at some indefinite point in the future.

Snow removal businesses, for instance, may only operate during two winter months and use costly equipment. Still, they may not be paid until 90 days, or some other time, after the task is completed.

For this reason, businesses may find relief from various problems by selling their accounts receivable and utilizing the proceeds to cover extended payment terms, a lack of access to credit, cash flow problems, and unanticipated costs.

In addition, the company may begin reinvesting in expansion projects sooner than it might if it had to wait to be paid.

There are two potential funding sources for outstanding bills. You may simply sell the unpaid invoices to boost your working capital quickly, or you can use a more intricate arrangement to get quick access to credit.

Traditional invoice factoring, the most direct competitor, offers many of the same benefits but with less agility and speed. In addition, p2p invoice financing is expected to deliver a better user-friendly experience for the firm because of its digital nature.

P2p Investors Can Make Money Through Invoice Trading

It is an example of peer-to-peer lending; however, unlike p2p business lending and p2p consumer lending, in which the investment is typically unsecured, the invoice itself serves as collateral for the loan.

However, depending on the payment term’s structure, the firm owed the money. In the p2p platform, there is always the chance that the consumer will never pay the invoice, which might result in an expensive and challenging procedure.

Let’s say you’re an investor and you don’t want to lend the company the full sum of the invoice value. In that case, the borrowing company has a strong incentive to collect the total amount due on the invoice, or else you, as online investors have additional investors interested in collecting the outstanding collateral.

For investors in the p2p invoice market, the risk may be mitigated by purchasing a smaller fraction of a more significant number of invoices. This will guarantee that many parties, including the other investors and the p2p platform, have an interest in the invoice being paid according to the rules.

Now, let us go through the significant benefits.

Benefits of Using Invoice Trading

Let us see the benefits or good returns from the perspective of businesses and investors.

For Investors

Investors will find a lot of potential in the invoicing industry as well. By spreading out their funding sources, they can generate excellent returns. An invoice is included as collateral in this loan, giving lenders more security and reducing the likelihood of negative surprises.

Only a tiny fraction of non-bank lenders even provide service. You’ll see how promising this alternate approach might be when you realize how many overdue bills there are.

For Businesses Who Resell Invoices

Although the primary benefit is providing organizations with rapid access to liquidity to address cash flow demands, there are numerous additional benefits as well. To begin, another funding option may be established quickly and effortlessly in an internet setting.

The second benefit is the unlimited scope for customization. It is only when companies think it essential that they choose to sell invoices.

Companies’ privacy is protected, as well. Debtors are often not informed of the company’s action since it has no impact on the continuing operation of the business.

Third, foreign unpaid invoices may be readily funded due to the global nature of the investors in invoice markets.

Before we conclude this article, let’s see the pros and cons.

Pros & Cons of Invoice Trading

Let’s begin with the comparisons.

Pros Cons
First, it shortens the time firms get their hands on cash—typically from 48 hours to zero. Because the whole process is conducted online, getting your hands on your money is a breeze. You can trade invoices for your business benefit and get a cash advance.
Transaction costs in the international trade of unpaid invoices might be high. That’s because things like running a credit check, filling out an application, and going through processing all cost money. This may add up to 5% of the overall billing amount.
It is an easier and more flexible alternative to conventional company loan terms and financing plans.
Transferring debt management responsibilities to an outside company might be unnerving.
From an investor’s perspective, it’s a safe and simple approach to generating high profits.
Concerns may also arise for business owners when services attempt to contact their clients directly.
It eliminates the need for company owners to follow up with clients who are late on payments and keep track of the status bills.
If your clients are other companies and your invoices are commercial, you may participate. It is not an appropriate method of financing if your clientele consists of the general public.
It shifts the burden of this tedious chore on the platform itself.
Cash-flow shortages are the only kind of firm financial issue that may be remedied. You won’t benefit much from it if your clients are trustworthy, pay on time, and provide fair payment conditions.
Invoice financing is a fast and simple method for funding cash to businesses.
Alternative forms of finance may be better suitable if you need money for something like new machinery.

Wrap Up

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Jayanti Katariya
Jayanti Katariya About the author

Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.