Invoice trading 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 often committed to fund ALL their invoices and will be committed to a long term contract. It is worth noting that invoice trading can work alongside traditional invoice finance facilities in certain circumstances.
How it works
The seller uploads the invoice(s) onto the invoice trading 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.
First-hand experience of invoice trading
At Trans Capital, we’ve found invoice trading platforms prove very beneficial to clients who already have existing invoice finance facilities, 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 gap in a company’s working capital, and cause a major disruption to the business.
For example, one of our clients had 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 this provider was 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 an invoice trading platform and, inside a week, with the agreement of their invoice finance provider, the said invoice was uploaded onto the site. 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.
What can you expect it to cost?
When invoice trading first started and buyers where getting accustomed to the new methodology, rates were around 2% per month.
As time has moved on, these rates have been driven down on the back of increased competition from buyers, and additional comfort gained from the track records of repeat “sellers”. Rates generally range from 1.25% – 1.75% per month. A small number of auctions have been driven down as far as 0.50%.
Trans Capital Insider tips
Invoice trading is likely to be more expensive than an overdraft facility you can access at a cost of say, 3% over base. However, if you haven’t – or your overdraft facility is being reduced by your provider, or your business has a ‘lumpy’ cash flow with spikes at specific times throughout the year, invoice trading is worth considering for the following reasons:
- The flexibility of being able to use the service as much or as little as needed
- No renewal fees or disbursements
- Can be used in conjunction with your existing finance arrangements
- Lower levels of personal security pledged
How Trans Capital can help
We are specialists in invoice trading and single invoice finance and are able to advise you on the most appropriate and cost effective facility for your business.
And contact us to arrange a Confidential Consultation.