Reducing the constraints of invoice discounting
Selling all your invoices to an invoice discount company is a tried and tested method of bridging the liquidity gap between completing an order and being paid by the purchaser. Far from being a one-size fits all solution, however, conventional invoice discounting is seen by many businesses, particularly SMEs, as making a less than perfect fit. One of the main factors is the inclusiveness of the typical arrangement, where every invoice has to be assigned to the finance house even if a proportion of the purchasers pay immediately on delivery.
There is another consideration which can have an impact on the SME’s ability to expand while involved with invoice discounters. The financial institution usually takes a debenture over the client’s fixed and floating assets. As a result, there is no ‘spare’ security in the business if the owners wish to enter responsibly into other financial commitments outside the funding of invoices.
On the grounds that nature abhors a vacuum, funders have come into the market in recent years with products designed to meet the needs of businesses which may have only an occasional need for working capital or, if there is a regular demand, it is at a level which would not justify the sale of their complete invoice book. These financial specialists are prepared to purchase only the invoices which the client offers them to cover the funds required at a given time.
On demand invoice funding – if the quality is right
In four years of trading, the Hampshire-based Platform Black has carved out a niche in this ‘on demand’ style of invoice funding. The company is majority owned by GLI Finance, an organisation which has extensive involvement in the Alternative Finance sector across the world. As its name would suggest, the UK operation employs an electronic platform to help match funders to the flow of invoices which are considered acceptable for this mode of financing.
Caroline Langron, the MD of Platform Black, explained that two types of business approach the company with invoices for sale. “There is the typical smaller or medium scale operation that is seeking to increase its own liquidity. And there are trade finance houses which have already funded a business, and hold invoices for the value of the development and stock they have financed. They want to recover liquidity to commit to further trade deals ahead of the date at which the invoice would otherwise be settled. Those specialist financiers complement our own role.”
Trade & Export Finance (TAEFL) fits neatly under that second heading; its specialist finance associates UK EXIM and UK EXIM Finance constantly financing SME orders in the UK and export markets. As Mark Runiewicz, the CEO of TAEFL, noted “Collaboration with Platform Black offers the potential for us to assist a greater number of smaller companies through a critical phase in their development. We are looking forward to working with Platform Black as awareness of the facility increases.”
How does Platform Black operate without the safety net of debentures over which traditional invoice discounters operate? The answer appears to lie in the strict evaluation procedures to which all invoices are subjected. Andrew Howard, the company’s Head of Operations, outlined the process. “We check the invoice and all supporting documentation to establish that there is valid legal title to the proceeds. An assessment of the quality of the client, including Anti Money Laundering checks, helps to confirm our view that the deal stacks up.”
The deal is passed to the company’s in-house underwriting team, with tiers of approval appropriate to the value of the invoices being passed to the platform. There are situations where additional security may be considered necessary – where the exposure is likely to be in excess of £250,000, for example.
The HOO described how security is taken. “If, for commercial reasons, the client does not want a formal charge over the company’s assets to be apparent at Companies House, the security may take the form of an equitable assignment of the invoices between the company and Platform Black (on behalf of the Funders).
“Where knowledge of the relationship with Platform Black is not an issue, the taking of a legal assignment remains an option. But immediately the funds advanced have been repaid by the discharge of the invoice, any such security is released.”
Andrew Howard saw only a limited role for insuring the invoices it accepts. “If the examination of an invoice and the supporting documentation is thorough, insurance would not be necessary except where one or more of the parties to a deal are based overseas and we cannot conduct due diligence to the same extent.”
When the final hurdle has been cleared, an invoice is considered tradable and offered in good faith to parties prepared to purchase it.
Complete information about an invoice is provided
Potential funders see the invoice and all of the supporting documentation so a reasoned decision can be made about whether to fund it. Where specific information is commercially sensitive, the team at Platform Black will redact it as necessary and declare on the platform alongside the invoice that they hold the full details and are satisfied with them.
It would be reasonable to assume that, with the depth of investigation entered into by Platform Black, every invoice offered on the platform is of the same quality and the interest payable to funders is therefore at the same flat rate.
While the quality is indeed broadly consistent across all invoices being offered, there are two distinct ways in which they are offered and accepted. Caroline Langron again. “The first is an auction which is run generally for smaller invoices, and where funders bid for at least 5% of the invoice and state the interest rate they are seeking. When the bids close, the prevailing rate is the one at which the invoice is fully subscribed, and that sets the rate for all of the participants.
For larger transactions, Platform Black sets an ‘appropriate’ interest and funders purchase any part of the invoice at that rate. Is there not a danger that perhaps 85% of an invoice might be taken up, leaving the transaction to fail? The MD described that as a very rare occurrence: “Only two invoices have so far failed to complete the course. In practice, we have funds our own which would be used to top up in the case of a potential shortfall. Another scenario is that the client is satisfied with the amount of money raised and terminates the sale at that point.”
Three distinct groups of lenders finance the invoices traded on Platform Black. Certified High Net Worth individuals (HNWs) form the first tier, generally committing between £5,000 and £50,000. Beyond the £500,000 mark are institutional lenders, some of whom place what are effectively discretionary funds with the Platform Black managers to finance invoices. Lending parameters might include taking stakes up to a certain value in IT or residential construction, for example.
And the gap between £50,000 and half a million? According to Caroline Langron, funders there are typically family offices – private wealth funds seeking a relatively safe way to secure an acceptable return on liquid cash holdings. Given that there is an estimated £100 billion of this family wealth money in the UK, intermediaries such as Platform Black are unlikely to run out of funders if the quality of invoices on offer is high enough.
The invoice platform model which Platform Black pursues is distinctive but not unique: variants exist in the marketplace. The method of matching invoices to funders under strict quality control is designed to promote a greater flow of invoices to satisfy the growing appetite for invoice financing. Given the controls in place at Platform Black, it is a route which attracts funds from lenders and can only serve to increase the liquidity available to the cash-hungry SME community.