January 2, 2024

Calling Invoice Finance Providers: Grow Your Business and Steal a March on Your Competitors

It's time for finance companies to review the opportunities for growth and risk mitigation to be had in shifting to Irrevocable Payment Undertakings (IPUs) in supply chain finance and commercial 'Buy Now Pay Later' (BNPL).

In the August edition of Insight, I wrote about the game-changing Electronic Trade Data Act (ETDA) and its potential impact on trade finance not just in the UK but worldwide.

Now, the ICC UK and the Centre for Digital Trade and Innovation have published a Report entitled: "Seizing the Moment - Unleashing the Potential of Trade Digitalisation".

In Their Words

"This seminal report unveils tangible evidence of the commercial advantages stemming from digital paperless trade transactions available today. Companies embracing this opportunity stand to gain enhanced liquidity, risk mitigation, cost reduction, simplified ESG reporting, ultimately driving improved profitability and broader market access."

The report gives real-life examples of how businesses have benefitted from digitalisation. Drawing from these examples leads to a summary factsheet within the report highlighting, amongst other benefits:

  • 15% increase in profitability
  • Transactions completed in 1 hour
  • Data transfer in 1 min
  • 100% removal of logistics paperwork
  • 18% reduction in shipping costs
  • Liquidity raised 7 days faster

It's imperative that no time is lost in taking advantage of the benefits of using digital technology in trade and in financing that trade; it's almost a now-or-never situation. The Electronic Trade Documents Act has made it possible to get unprecedented benefits on a large scale like never before.

This is all well and good for international trade, but what does this mean for those businesses that finance SMEs?

The EDTA opens the door for finance providers, which currently offer working capital finance to SMEs, to improve their range of products, reduce risk and increase profitability.

How can they do this?

Currently, invoice finance companies which offer Supply Chain Finance/Reverse Factoring/Embedded Finance/BNPL tend to use the purchase of receivables to get ownership of these assets so that they can advance funds against them.

Onboarding is, therefore, cumbersome, slow, and costly. It requires unencumbered assignment of the right to receive payment. Depending on which of the forms of finance above is provided, a debt purchase agreement may need to be signed with the supplier, legal charges taken, and there is the absolute requirement that any prior legal charges over the suppliers' book debts are waived in the financier's favour.

Costs of administration may be high, too, with the need for debt verification, contractual terms to be reviewed, etc., to minimise risk.

If the financier instead adopts the use of digitised irrevocable promises to pay – bills of exchange/post-dated cheques in effect – there is no need for charges to be taken, waivers to be obtained and importantly, as the security for funds advanced is based on the digitalised promissory note, there is no performance risk.

Enforcement, if the bill is not paid, is against the business for sums due. And the risk of non-payment can be, and usually is, mitigated by credit insurance.

And let's not forget that as these promissory notes are negotiable, they can make funds needed by the financier easier to obtain from banks or other funders.

Find Out More

Of course, the above is a very brief summary of what is anticipated by the ICC to be an area of massive growth over the next few months and years, but it is very important that financiers act immediately so as not to miss a once only opportunity to get ahead of their competitors.

For a fuller explanation of how adopting IPUs to replace the assignment of invoices can benefit your business, please email me to arrange a fuller discussion.

Jeff Longhurst Finativ

Jeff Longhurst

Jeff has accumulated over 40 years of experience in the invoice finance and asset-based lending industries, with CEO/managing director positions in clearing bank subsidiaries, specialist asset-based lenders and independent invoice finance providers.

Jeff is a former chairman and CEO of the Asset Based Finance Association (UK trade association for invoice finance) as well as a member of the Executive Committee of the EU Federation for Factoring and Commercial Finance.

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