The rise of virtual banks in Asia is a testament to the limitations of financing opportunities for small businesses among incumbent banks. That traditional banks are not fazed by the entry virtual banks reveals that despite the marketing of so-called small business-friendly offers, incumbents are focused on the very established small businesses with acceptable collateral.
Most SMBs want to do business with big companies because of the potential (aka promise) of a long-term business relationship, which translates to stable income source. However, as many will quickly learn, large enterprises often practice payment terms that can leave businesses hanging on to invoices they can’t really use to pay salaries or suppliers.
What to do?
Invoice factoring or the practice of selling receivable-invoices to a third-party at a discount in exchange for getting the cash now is a legitimate option for businesses that know they cannot rely on banks or governments to keep them afloat.
Click here for a history of invoicing finance, including factoring and trade finance.
Why should a chief financial officer be interested in invoice factoring is the subject of PodChat for FutureCFO’s dialogue with Morgan Terigi, co-founder and CEO of Incomlend, an invoice exchange platform for connecting businesses and private funders on a global level.
In describing Incomlend, Terigi noted that the fintech specialized in receivables financing online with a marketplace approach. He further honed this to receivables related to cross-border transactions. Terigi said the marketplace allows for multiple investors to determine what receivables invoices they are willing to acquire as an investment instrument.
Terigi acknowledged that most of Incomlend’s customers, those parting with their outstanding receivables, are exporters and importers.
Why a CFO should care about invoice factoring
Asked why a CFO should care about invoice factoring, Terigi said from the CFO’s perspective having enough liquidity in the system enables its suppliers to improve their services, these suppliers are also able to pay their own suppliers putting more liquidity in the supply chain as well as salaries of employees.
“This potentially reduces the quality problems and improves delivery time. There is also the added benefit of suppliers able to survive business cycles longer guaranteeing the CFO’s company of stability to its own supply chain.”
Terigi said that while invoice factory is an old asset class from the perspective of banks, for the CFO and Treasury, it (receivable invoices as an investment instrument) represent a new asset class that is democratized whereby funds and treasurers are starting to have access to this asset class.
“This asset fundamentally is not correlated with the financial markets, so this is a huge advantage especially in situations where there are instabilities. This is something where you can get a very stable return for your money. It may not give you the returns typical in the stock market but it also doesn’t have its volatility. Instead, you get a very stable return that is linked to the real economy,” Terigi elaborated.
To the question of the risks presented by an unregulated market, Terigi said CFOs will need to look at this from a due diligence perspective. That said, he is confident that the technology used in the screening of the assets (receivables invoices) and the owner (of the invoice) to make adequate checks to determine the safety of the asset.
Competition and competitive landscape
Terigi explained that during the early days of Incomlend there was little by way of competition. It also meant a lack of awareness of the possibilities presented by the platform vis-à-vis the more traditional approach that businesses would consider – banks.
With an estimated market of 14 to 17 Trillion dollars’ worth of goods moving in marine shipment alone, he estimates the invoice factoring market at three to four trillion dollars – a market potential that is ‘huge’ for any one fintech organisation, including Incomlend.
He is confident the entry of competitors will only help raise greater awareness and comfort among potential customers who will now have an alternative to banks.
A future for Letters of Credit
Himself a former user of Letters of Credit (L/C), Terigi said nothing has changed as it relates to L/C issuance and use. He acknowledged that a sister company to Incomlend, LC lite, looks to simplify and digitise the entire process. He expects L/Cs to continue to be used by those preferring the security of a closed account.
Blockchain as enabler of trust
Terigi sees two applications of Blockchain in the business of invoice factoring. One is where all documents are on the platform, any changes including conclusion of the process are all made on the platform. This solves the current issue of too many email exchanges as part of the messaging.
“Emails are linked to cybersecurity issues. Having all documents on the platform and everything verified on the platform mitigates against the potential for fraud associated with emails,” he explained.
The other application he alluded to comes in the form of blockchain that facilitates communication without divulging information. By allowing machines to talk to each other directly to validate transactions, you can eliminate the potential of someone trying to sell an invoice more than once – as a blockchain query will reveal the status of an invoice.
Click on the podchat player to listen in full to Terigi’s take on why alternative financing is even more important to CFOs in 2021.