Invoice Finance market - overview
The UK market for Invoice Finance (Factoring and Invoice Discounting) is the largest in the world with Invoice assignment levels being £275 Billion or approximately 12% of UK GDP as of 31/12/13.
All the main factoring players are members of the ABFA (Asset Based Finance Association) who “write” some 95% of the factoring business in UK. Some highlights of the December 2013 ABFA Statistics are shown below.
The growth of Invoice Finance in the UK can be attributed not to the regulatory environment, but mainly to the negative culture of the bank’s policies in lending to SMEs for working capital. It’s long been the case in the UK that banks require hard collateral to underpin their lending to businesses. Collateral such as Personal Guarantees, Charges over Director’s personal property (house) as well as an All Asset Debenture/Charge on the business itself. Many SMEs either cannot do this (as they do not have sufficient personal assets) and/or they are not prepared to offer those assets as security.
Invoice finance companies (Factoring companies) on the other hand are less demanding on the requirement for Collateral but they usually require the seller company to pledge all their annual sales invoices to them. They also require a fixed term contract to be signed for one or more years. Invoice Finance sector remains highly competitive with effective rates (money costs plus all charges/fees) ranging from about 8% per annum for big deals up to 12% per annum for smaller deals.
The main sector statistics from 40 ABFA Members are as follows:
No of seller companies using factoring
Value of Invoices assigned/factored
The full ABFA report is available from the above mentioned ABFA website.
The last three years has seen the emergence of Invoice trading Platforms in the UK. There are two main players at the present time but this will grow in number for sure. The Invoice trading platforms currently represent about 0.3% of the addressable market. So there is huge potential for the platforms and I have little doubt that this market share will grow hugely both through the taking of business from traditional factoring companies and also by creating new entrants/users to invoice financing.
The Invoice platforms in the UK are split into two types. The first variant being Invoice trading platforms where Investors buy/invest in Invoices through a Bidding process. The second variant is SCF – Supply Chain Finance platforms – where the bidding process is replaced by agreements between the Buyer and Seller Company and the Investor.
One of the benefits a seller business has from using a Platform is they do not have to commit to a lengthy contract (1 or 2 years like factoring), nor do they have to put all turnover through the platform – only selective invoices. A seller business can trade one or more invoices at a time depending on their cash/liquidity needs. This is a major benefit as is the fact they don’t usually have to give personal guarantees and fixed charge or debenture over their book debts and other company assets. This makes for a very flexible and attractive solution.
Platform – some strengths and weaknesses for the Investor
The rights and benefits to the Invoice (the asset) are through Equitable Assignment directly from Seller to Investor. The Investor has to rely upon the Seller’s signed agreement with the platform that Invoices are free to be assigned to the Investor.
The platforms accept no liability or responsibility for the trades on the platform so the Investor has to rely on the information on the platform. In some cases the full “paper trail” for the invoice is not available to be seen by the Investor.
Trades can be disclosed or confidential, which means that the Debtor (Buyer) is either aware or unaware of the assignment of the Invoice on the platform and to the Investor. Confidential is more risky.
d. In some platforms the Seller’s name is not disclosed nor is their full financial standing. The Investor has to reply upon the platform to perform appropriate Due Diligence.
e. Attractive returns for the Investor are circa 8% - 14% before tax.
f. The Investor benefits from the investment sums turning over 4 to 6 times a year enabling quick yield returns and assessment of risk.
g. Investors funds are not committed for long periods.
h. Choice to choose lesser or higher risk trades or mixture of both
i. Auto bid enables the Investor to set parameters for automated buying of trades within their given rules thereby reducing manual input.
The above issues represent a tiny sample of some of the items you need to pay attention to.
How Investors should buy Invoices assets
In common with all asset classes, the Investor will need to make an assessment of the origination channel’s (the platform) strengths and weaknesses and fully understand the platform before investing. The main issues the investor needs to pay attention to are:
a. Detailed Report on the Platform - its functionality and strengths and weaknesses – how it works. Is it an acceptable asset origination channel?
b. Produce an Investment Policy specific to that Platform. This will determine the type of invoices in which investments will be made, the blended risk and return requirements, which invoices to buy and which to avoid.
c. Produce Evaluation Policy for when assets (invoices) are not paid or paid late for reflecting the true NAV of all investments in the portfolio.
d. Produce Provision Policy.
Good opportunity for Sellers?
Without question the Invoice Trading platforms offer a fantastic opportunity for sellers and suppliers of goods and services. With the banks being risk adverse to SMEs and Invoice Factoring companies having quite rigid terms, funding rules and contractual requirements, the Invoice Trading platforms offer a flexible channel in which working capital can easily be raised.
The Seller may trade one invoice and never use the platform again. It can “dip in and out” – using the platform as and when liquidity and cash is required. There are no contractual commitments to whole turnover, usually no asset pledges over company assets and usually no personal guarantees – where can you get such favorable conditions from traditional funding sources? But just be aware of the cost and be prepared to negotiate.
Invoice Trading Platforms offer attractive yields and safe investments. However, the issue is about managing the risk and understanding the platform. If you arm yourself with such knowledge, together with strong policies and rules, the Invoice Trading Platform will be a successful partner in your Investment portfolio.
Barry R Rogers
T: +44 800 612 7049