Invoice trading enables companies to sell their invoices online as a fast and convenient way to release money that can be used to enhance cash flow. It is based on the peer-to-peer lending framework as it connects businesses struggling with cash flow with interested investors looking to make a quick profit through subscription to online auction sites. Also called ‘auction-based invoice finance’ invoice trading is an invoice finance solution that is among several disruptive FinTechs responsible for drastically changing the landscape in the banking and finance sector.
Invoice trading platforms
This applies to peer-to-peer invoice finance, where websites are established to provide secure platforms for the trading of invoices and supply chain contracts. This can be a win-win situation when it brings together a company that urgently needs working capital and an investor that can benefit from what the company is offering.
How does invoice trading work?
Companies typically sell their invoices individually or collectively by adding them to an invoice trading platform such as a website. If the investor agrees with the terms set by the company, they proceed to bid for the invoice competitively and if the company accepts the investor then advances the money. Investors are usually corporate or private entities and they require the company’s background information, pertinent details contained in the invoice as well as copies of the original invoice before making the advance.
Costs associated with invoice trading
These are not set in stone since the invoice amount, terms and industrial criterion are all highly variable. Sellers can receive an advance amount that is as high as 90% of the total invoice value but such cases are unique and far apart. The average amount received is a little lower (approximately 75%) with interest rates that range from 2% to 3%. A transactional fee also comes attached with each advance; it may depend on the credit period agreed on but is usually 1% or half of that.