We spoke to Andrew Howard at Platform Black to find out about more about invoice finance.

What is invoice finance and how does it work?

Invoice finance, including factoring and invoice discounting, has been around since at least Roman times. It is a method of accelerating cashflow for SMEs, allowing them to grow at a faster rate than would otherwise be possible. Despite the flack it has received in the past, recent developments are bringing it to the fore as a positive SME finance choice.

In general, invoice finance has changed very little since its first introduction to the UK, but with the introduction of P2P lending, the product has altered considerably. Invoice Financiers can now fund invoices that otherwise would have been rejected. Stumbling blocks such as debtor concentration, where one debtor is a high percentage of the overall ledger, and dilution when credit notes are issued, have been overcome.

How is peer to peer lending transforming invoice finance?

P2P lenders have brought to the market the idea of selective invoice finance, meaning SMEs can get the funding they need without contracts, and without the need to fund their full ledger. This means clients can choose when and how to obtain their funding, and dip in and out as needed.

The alternative P2P market brings about changes to old fee structures, contracts, and difficulties with exiting the product, all to the benefit of the SME. Typically SMEs have tended to move from financier to financier in an attempt either to reduce fees or to gain access to more funds. The nature of the alternative market assists the traditional market in retaining clients by topping up the funds they can access, without having to move between providers. Companies that previously were unable to finance invoices can now take advantage.

The traditional invoice finance market has achieved approximately 2% growth year on year. However, new P2P lenders like Platform Black see over 40% of their client base being new to the invoice finance market. This will have an inevitable knock on effect to traditional providers, as the clients outgrow their facilities and mature into full service invoice finance.

Originally the P2P concept was designed to disrupt the invoice finance market, but the service has grown into a complementary product. P2P financiers are able to work hand in hand with existing invoice financiers.

Further growth in the selective invoice finance market will inevitably see traditional lenders work hand in hand with the P2P financiers to develop their products. New markets will develop but traditional processes of verification and underwriting new deals remain key to mitigating the risk of the growing product pool.

Supply chain finance facilities are also growing in popularity, specifically within the construction industry, where an approved supplier’s invoice can be immediately funded. The debtor of the invoice issues a promissory note, for the invoices of their supplier, which promises to pay the amount of the approved invoice, therefore reducing the risks of non-payment.
The development of Platform Black’s supply chain finance product suitable for the mid-market provides working capital for SMEs which do not fit the traditional model for invoice financiers due to poor credit rating or high concentration issues. This is an ideal place for P2P lending in the alternative market to step in and make a positive change in an area not serviced by existing financiers.

This, alongside the government’s recent initiative to remove the ban on assignment clauses from contracts, should see a growth in the invoice finance market. It is a combination of traditional and alternative invoice financiers who have pushed to make this change a reality.

At the end of the day, whether it be traditional or alternative, providing finance to SMEs using their invoices is the crux. Recent changes in the market have seen invoice finance accelerate, and this can be passed on as growth to SMEs, which can get their funding faster, cheaper, and more flexibly.