In the fifth part of our series on “How Fintech is disrupting SME and Startup Financing”, we present to you the automation in invoice financing that is helping SME and Start up businesses.
Running a SME business on trade credit is common. Seemingly a simple practice, trade credit, actually, takes away a lot of your time and effort. You’re not at a level-playing field while negotiating or enforcing a credit agreement with a larger (in scale) customer.Ultimately, you find yourself
arduously pursuing late or overdue payments. The problem exacerbates if you start up a business and are yet to master the skills, gain the experience and acquire the resources to manage trade credit in a standardised manner.
Insufficient liquidity can dissolve your SME or Start up
Late or no payments impedes the growth of your SME or Start up. Inadequate liquidity can financially distress your SME or Start up. Customers delaying payments adversely affects even the solvent and stable. This is because companies can’t immediately finance cash shortage.
The traditional solution may not fit the cash requirements of your SME or Start up
To address the problem, many SMEs resort to factoring – selling receivables to a third party in exchange for immediate cash – as the means to improve liquidity. The sale is at a discount and a retainer until recovery of the receivable.
Factoring is likely to grow at an annual rate of 10—12%.
However, traditional factoring isn’t helpful to SME. It has long-term, complex contracts with fixed volumes.
Online financing solutions resolve SME’s cash woes
Online financiers provide SMEs and Start-ups a flexible tool for quick and easy monetization of their receivables.
You start by integrating your SME business’ accounting software with the invoice financier’s platform. Then you upload your invoice on the platform. The platform offers your invoice for sale to a pool of professional investors. After discounting and retaining the sale proceeds, the balance cash is immediately available to you. You get the retainer when the debtor pays. In factoring, the debtor pays to an account on the platform. In invoice financing, the debtor pays to you. Unlike factoring, invoice financing is a cash advance secured against your invoices. Thus, the platforms only facilitate the funding process.
Inbuilt models evaluate risk using the information on the frequency of loan applications and reliability of payment. Over time it translates to factoring at lowering discounts.
Automated platform means no distraction to the SME
Automation means a respite from arduous efforts to prevent working capital deficiency. As the platform handles, monitors and collects your receivables, you can focus on more productive activities.
Fintech does more than just financing, it empowers with knowledge
Opacity in common credit terms can put a novice SME or Start up at a disadvantageous position to seek favourable credit terms from mature buyers.
Fintech providers can guide you with relevant knowledge that allows you a better bargaining power. By virtue of “big data” – information on the receivables it finances – online financiers aggregate and compare credit terms of similar businesses. They can, then, give recommendations to their SME or Start up users. Thus, fin tech could unveil and bring transparency in the opaque B2B credit market.
Key players in the segment
Some of the key fin tech companies in this segment include MarketInvoice (UK), Fundbox (US), NoviCap (Spain) and Finexkap (France). Reputedly, MarketInvoice has financed more than 500 million to date.
Online invoice financing or factoring need electronic infrastructure. So, ensure your SME is on electronic platforms that connect to banking and payment systems. Thus, you will discover a reliable and convenient mode of working capital financing.