Is Invoice Trading a Good Alternative Financing Solution?
Ezra Cabrera | August 19, 2022
- Invoice trading allows small businesses to have quick access to liquid funds by selling their outstanding invoices to investors.
- It only takes anywhere between 24 and 48 hours for debtors to get their funds once their invoices are sold.
- Investors, wealthy individuals, and asset managers sign-up for online platforms that allow invoice trading. They can select multiple invoices or a portion of them as short-term investments.
- Invoice trading is a much more attractive option to small business owners who are not able to provide the requirements being asked by traditional lenders.
- In invoice discounting, you sell your invoices to one discounting company. You are committed to pay-off your debts to one account. On the other hand, invoice trading allows you to pre-select which of your invoices you want to auction-off or what portion you would like to sell.
If you're like most new small businesses, you would prefer to get an alternative financing solution that doesn't require a contract. This is why invoice trading has become a top-of-mind: invoice trading allows companies to sell their invoices to investors through online platforms, eliminating the tedious loan application processes you need to prepare with a traditional lender.In this article, we'll deep dive into the ins and outs of invoice trading and why it's a popular alternative financing solution for small businesses. If you're already familiar with peer-to-peer lending, most likely you know the principles of invoice trending. If not, we'll break it down for you.
What is Invoice Trading?
Invoice trading sometimes referred to as auction-based invoice financing, is a process by which a company sells its invoices via online platforms to increase its capital or improve cash flow. Some small business owners do this to connect with investors who are looking for short-term returns.
In essence, business owners borrow money from investors and use their invoices as collateral. Investors pay in advance your unpaid invoices so you have enough funds for various needs, like paying outsourced talent, repaying debts, or replenishing your inventory.
How Does Invoice Trading Work?
Similar to how peer-to-peer lending works, invoice trading allows you as the borrower to auction-off your overdue invoices to investors in an online trading site. Usually, these online trading platforms have a community of investors, which are largely made up of hedge funds, asset managers, and other wealthy individuals who are interested in short-term investments, paying you in advance for a certain interest.
The platform will verify your invoices before making it available for auction. Once your invoices are verified, they will be sold to the site, allowing multiple investors to buy portions of the invoice.
How Can Borrowers Benefit from Invoice Trading?
With invoice trading, you get quick access to funds without the stringent loan application process. You can receive up to 90% of your invoice's total face value in as early as 24 hours. On top of that, you can select which of your invoices you want to sell and when, instead of committing your whole ledger (like in other invoice financing options).
How Does Peer-to-Peer Lending Work?
Peer-to-peer lending allows borrowers to directly reach investors who loan money to qualified applicants. Some new company owners choose this route especially when they don't have the requirements to borrow from banks or credit unions. Each website sets the rates and terms, which are often recommended by investors who are part of the community.
What's great about peer-to-peer lending sites is that they allow small business owners to choose from a variety of loan options with competitive rates at low charges. Investors don't discriminate based on the reason for selling the invoices. They lend money to everyone they deem to have favorable credentials and proof in paying back the loan.
Invoice Trading vs Invoice Discounting: What's the Difference
Before we differentiate invoice trading vs invoice discounting, let's discuss first what invoice discounting is. Invoice discounting is a popular invoice financing method where you sell your total unpaid customers' invoices to an invoice discounting company to gain access to liquid funds.
In invoice discounting, lenders will pay you around 80% of your invoice's total face value. Take note that the invoices you will be selling should be less than 90 days old upon checking its validity.
The only downside to invoice discounting is that only a handful of small business owners get approved because only commercial invoices are accepted by discounting companies. Moreover, this type of invoice financing favors much larger organizations that already have its own credit management and control reporting system.
On the other hand, invoice trading doesn't keep small business owners from selling off their invoices to multiple investors. Compared with invoice discounting, invoice trading also allows new company owners to sell off their invoices.
Invoice Trading vs Invoice Factoring: What's the Difference?
Invoice factoring is somewhat similar to invoice discounting, except that the invoices are sold off to an invoicing company and they are the ones in-charge of collecting your customer's payment.
To distinguish the two better:
- Invoice discounting - you as the business owner have 100% control over how your unpaid invoices will be collected from your customers. The invoice discounting company will give you the agreed percentage of your total invoice value, then you will pay it back with fees and charges. Since you will be manning the collection, you will also handle the tedious accounting and auditing processes.
- Invoice factoring - you as the business owner don't have control over the invoices you sold. That means that customers will know that you've taken invoice factoring because the invoice factoring companies will personally reach out to your customers to collect their payments. The good side is, you get to save time, which you can use for various projects.
Now, what makes invoice factoring different from invoice trading? Invoice trading eliminates the need for you to find an invoice factoring company to do the job for you. Basically, you'll be selling off your invoices to the online platform, then invoices can buy your invoices (or portions of it) from the site. In invoice trading, you get to maintain your relationship with your customers because they don't have to coordinate with someone else to pay their invoices.
How to Get Started with Invoice Trading
If you are looking for an alternative financing solution that gives you the money you need ASAP, then you should definitely explore invoice trading. To start, you need to register with invoice trading platforms like Incomlend (based in Singapore), Finanzarel (based in Spain), and Populous (based in the United Kingdom).
Compared with traditional lenders, your business doesn't have to be in operations for several years. You also don't need to provide collateral. They are only looking for small to medium businesses that are operating for a minimum of six months and that the debtor has a favorable credit rating and history.
It's worth noting that registering on these sites may take several days before you can get into the platform since the site will also need to run background checks on you based on your application form. If you apply for banks and credit unions, it might take several months without a guarantee of being approved.
Once you get into the system, you can start posting your invoices and auction them off into the site. The platform will verify the validity of your invoices before releasing it for bidding. When that's released to the marketplace, online investors can start bidding on a portion of or your total invoice amount. The bidder with the highest price offer wins the invoice.
When investors have purchased your invoices, the platform will transfer the proceeds to your account within 24 to 48 hours. To pay it back, you have to settle your invoices by paying directly to the platform's account. Upon confirming your payment, the platform will send the investor's capital with their returns. For remaining balances, the funds will be remitted back to you minus the service charges and other fees.
Invoice Trading Rates You Can Expect
In invoice trading, you can expect your rates to be around 2% per month. Depending on your credentials, the quality of your invoices, the platform you signed up with, and the diversity of the platform's investors, rates could come down anywhere between 1.25% and 1.75% per month. In some auctions, interest rates could even go down as far as 0.50%.
Is It Time to Sign-Up for Invoice Trading?
When money is tight and you need capital to fund specific needs such as business expansion or purchasing new equipment, invoice trading can be beneficial to your business. Why? Because you are able to sell a portion of your outstanding invoices if and when you need to without contracts or any other form of commitment. There are no lock-ins too.
Cash is sent to your account almost overnight as soon as the auction closes. There are huge opportunities in invoice trading especially when you want to have access to liquid funds. Just a rule of thumb: make sure to do your research first before signing up for just any invoice trading platform. Be open about your options and weigh the differences between each platform you'll find online.
When a traditional lender or financial institution is unable to provide funding, business owners often resort to asset-based lending.
It's essential to highlight that with asset-based lending, borrowers don't sell their assets. Instead, they're only borrowing against them. And since assets are used as collateral, the lender can claim them if the company fails to meet the payment terms.
Therefore, you must consider the risks and benefits of your business before deciding whether an asset-based line of credit is the best option. Indeed, it's the most viable choice in the right circumstances for the right type of business.
Asset-Based Line of Credit: Frequently Asked Questions
Do asset-based loans have low-interest rates?
Traditional loans are based on credit and cash flow, while asset-based lines of credit are based on underlying collateral and the company's financial situation, ownership, and organizational management.
Often, it's easier to get approved for an asset-based line of credit than for credit-based loans.
What will happen to the collateral if I am unable to repay my asset-based loan?
The lender may claim the secured assets if you fail to meet the loan repayment terms. As a result, you must take advantage of this type of financing only when you're certain you'll be able to make the payments on time over the entire term.