Invoice trading: a flexible new alternative to invoice finance

MoneyI would like to start this article by saying that we at Trans Capital Associates are an impartial advisor with no links or ties to any individual funder or other business.

However, following a number of recent experiences with our clients, I now feel compelled to mention a relatively new business that is pioneering a new form of funding, and indeed a new asset class, in the UK.

The name of this business is Platform Black. The methodology is simple, companies wishing to raise finance against invoice(s) raised can upload them onto an online platform where registered buyers are able to make bids to fund those invoices.  Once uploaded, the invoices can be funded in less than an hour.

Benefits

This method is particularly beneficial if the company seeking working capital finance doesn’t wish to be tied into a Factoring or Invoice Discounting agreement where they are committed to fund ALL their invoices and also be tied in to a long term contract.

I am not in any way denigrating Invoice Finance here; I believe it to be an incredibly valuable business finance tool in many cases. I am merely making the point that it is not for everyone, and that Invoice Trading provides a very effective alternative.

The other key BENEFIT of the Platform Black offering is that they are seeking to be a complementary service to traditional invoice finance, and not a business model that seeks to disrupt and eventually take over this established business finance offering.

Methodology

The seller uploads the invoice(s) onto the platform and sets their terms, for example:

Invoice value = £18,000 including VAT

Advance rate = 75% i.e. £13,500

Maximum cost of finance = 1.75% per month

Term = 60 days

The registered buyers, a mix of private and institutional investors, then make bids based on this information.  They are provided with background information on the Seller, the Debtor and the transaction itself, including copies of the invoice and other relevant documentation.

Case studies

We at Trans Capital have had several experiences recently where the Platform Black service has proved very beneficial to clients who already have existing invoice finance facilities, and indeed in one case a bank overdraft as well, where for various reasons the existing funder has not been able or willing to fund particular customers.

This can of course lead to a significant hole in a company’s working capital, and cause significant disruption to the business.  The first of our clients we introduced to Platform Black had just agreed a lengthy contract with a new customer, who had just placed a £100,000 first order.  They already had an invoice finance facility but they were not prepared to fund this particular customer (a well-known name) due to some of the wording in their contracts. The provider of these facilities had a charge over the book debts.

We introduced the client to Platform Black and, inside a week, they were able to obtain a waiver from the invoice finance provider and upload the said invoice on the auction.  The invoice was fully funded at the requested level within two hours.

This was obviously very beneficial to our client who was faced with a funding gap of some £70,000.

Certainty of funding

An important issue to one of our clients who used the service was the certainty that they would receive bids, and therefore the necessary funding required to fill the potential gap in their cash flow.

I am advised by the directors of Platform Black that they have not had any unsuccessful auctions.  Every invoice uploaded onto the platform in their first year of trading has been funded in full.

Costs

When the business first started trading and the buyers where getting accustomed to this new methodology, rates were around 2% per month.

As time has moved on, these rates are being driven down on the back of increased competition from Buyers, and additional comfort gained from the track records of repeat Sellers.  I am told by the directors of Platform Black that there has not been one bad debt to date.  Average rates now are just over 1.4% per month.  The lowest rate achieved so far is 0.5%.

Invoice Trading is obviously expensive if you have an overdraft facility you can use at say, 3% over base.  However if you haven’t – or your overdraft facility is being reduced by your provider  and you take into consideration the flexibility of being able to use the service as much or as little as needed, and the fact there are no renewal fees or disbursements, and that you can use it in conjunction with your existing finance arrangements, it can be a very useful form of working capital finance.

Other things to be aware of are the transaction fee charged per funded amount:

  • 0.50% per auction for a 30 day credit period (or £100, whichever is the greater)
  • 0.75% per auction for a 60 day credit period (or £150, whichever is the greater)
  • 0.90% per auction for a 90 day credit period (or £180, whichever is the greater)

and a lifetime membership fee to Sellers of £310, which is payable only after the first auction.

Supply Chain Finance

Over the past six months, Platform Black have developed a Supply Chain Finance product.  This is working successfully with a number of their larger corporate clients, particularly in the construction industry, who are seeking to provide their suppliers with quicker payments without adversely affecting their own working capital.

This is done by the corporate client introducing their suppliers to Platform Black, who then become registered Sellers on the platform.  When the corporate client accepts goods or services from their supplier (Seller), they immediately issue an avalised Promissory Note, guaranteeing payment of the invoice on a certain date.  This is sent to Platform Black and included in the information available to the Buyers – all of which means that the subcontractors can access 100% of the money tied up in the invoice in c. 3 days, rather than 30, 60 or 90 days.

This methodology is very attractive to Buyers, with auctions being fully funded in minutes.

If you would like to know more about Platform Black’s Invoice Trading platform, you can find it here, and if you would like to register your interest in becoming a member, you can do so here:

As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.

Image by: c_nilsen