Explore crowdfunding: Invoice trading is the most underestimated tool in alternative finance.
In this article, we will review invoice trading or also called factoring tool.
Let’s say there is a small bakery that bakes bread and sells it to a large retail chain shop. It produced and delivered its product to that shop, but they are not getting paid right away big players usually demand that they can pay in 60 and 90 days.
The company invested money to buy all the ingredients and they produced goods and delivered but they will receive money only in 90 days.
They need money to buy new ingredients, so they might go to suppliers and say hey give us ingredients we will pay you in 90 days when we will get many from our buyer, but if the business is small no one will be willing to do that because this is like giving a loan to small businesses.
They start thinking about where to get money. Getting a loan is too long and the chances that the loan will be approved are quite small. At some point, they understand that they have an invoice from a big company that basically promises to pay in 90 days, and the chances that they will not pay a very low.
The company decides to sell this invoice for e.g. 98% of its value, in such case they receive money today not in 90 days and they inform the invoice issuer that he has to pay the invoiced buyer now. After 90 days invoice issuer pays to invoice the buyer 100% so he made 2% of the invested amount in 90 days and everyone is happy.
So this is the essence of how the process works.
No what is a risk when investing in invoice trading?
There are two main risks. First is the risk of non-payment, meaning the buyer will not pay for the invoice due to financial problems.
To understand this risk you need to evaluate the financial standing of the company like in standard crowdlending.
But in this industry, there are few tools to minimize this risk. One is invoice nonpayment insurance issued by insurance companies which is widely used by banks and the second is the so-called “regress” that foresees that if the invoice is not paid investor can request money from the invoice issuer and in such case the risk of losing money is lower.
The second risk is that invoice will be disputed, meaning product quality will be bad or the invoice issuer will breach other contract conditions and the buyer will have legal reasons to refuse to pay.
To minimize the risk that the invoice might be disputed invest in invoices that are issued to partners with which the company has a long track record which indicates that
Let’s sum up
Invoice trading is not only a great investment tool but also provides small and medium businesses with the possibility to raise short-term funding from the general public.
But unfortunately, most of the platforms that are offering crowd investing in invoices are providing those services to big investors with minimal investment starting from a few 10s of thousands of euros.
To make this industry mainstream we need more platforms that are ready to offer services to retail investors.
That's all for now!
We wish you a great day and successful investing!