So Project Merlin is failing, banks aren’t lending, is invoice auction your option?
Despite signing up for Project Merlin, the four major UK high street banks (Barclays, Lloyds Banking Group, the Royal Bank of Scotland and HSBC) still failed to lend enough to SMEs in order to meet the quarterly-equivalent target of £19 billion – missing the mark by a whopping 11%. With these lacklustre lending figures, it is unsurprising that more and more journalists are casting doubts on whether the government could effectively guide the economy back to steady growth.
In fact, SMEs make up a significant portion of the UK economy, and unlike larger companies, they lack the ability to raise working capital publicly or the ability to bargain with the bank for financing options. The sad truth is that banks are now currently alienating small businesses as they are deemed ‘too risky’ to lend to, driving up their cost of borrowing.
So how can small businesses survive?
Fortunately, bright minds in the financial services industry have came up with some ingenious ideas to link investors’ deep pockets with small businesses abused by banks’ harsh credit conditions. New funding organisations have emerged in the market, providing SMEs a toe hold in the credits markets dominated by multinational banks. Invoice auctioning was pioneered in the US by The Receivables Exchange and brought to the UK by MarketInvoice. With the system in place, now small companies can auction off their invoices with ease. Dubbed as “the eBay for invoices”, institutional investors competitively bid against each other to advance cash against the invoices, allowing small businesses to sit back and enjoy the low financing cost. As opposed to the notoriously painful invoice discounting or factoring, invoice auctioning does not put businesses into a contractual lock-in, meaning that SMEs can sell as often or as little as they want. This allows businesses to try out the platform before committing to it. Moreover, invoice sellers are not subjected to any hidden charges, nor do they have to provide company debentures or personal guarantees; the whole process is completely confidential to a business’ end customer and no notification is necessary, protecting customer relationship.
What is MarketInvoice?
Based in London, MarketInvoice is the UK’s first online trading system allowing UK businesses to selectively sell the invoices of large business customers to raise cash. MarketInvoice functions as an online exchange where SMEs (“Sellers”) can post invoices for sale while various qualifying financial institutions (“Buyers”) competitively bid to advance cash against these invoices for a fee. Cash funding for SMEs is provided through competitive auction from a wide range of institutional buyers (investment funds, asset managers, family offices, high net worth individual). Those SMEs who receive funding from buyers will see their cost of finance decrease over time through repeated interaction on the platform and the gradual build-up of information and transaction history. The exchange serves to bring new capital into this market by creating a standardised and secure trading environment. It encourages those SMEs that have never historically considered entering into a traditional “whole-turnover” factoring relationship due to cost and reputation concerns, to selectively use the competitive marketplace at times when short-term funding is desired or required. It is straightforward for a company to register on MarketInvoice, and involves submitting financial information, sample terms and conditions of the invoices they wish to discount, and answering some questions on invoicing procedure. The only change to a company’s invoicing procedure (not unlike that required by an invoice discounter) is that invoices posted for sale need to have the bank details of an account in the name of the Seller but held by MarketInvoice. When the invoice eventually pays, the funds will flow into this account for MarketInvoice to settle and remit. Importantly, using MarketInvoice is completely confidential to a business’ end customer and no notification is necessary. Once up and running, a registered business can use the platform as frequently as it works.