Nearly every business shares some common characteristics: they started small, had limited resources, and were always in need of money. The monies part goes to pay for rental to facilities, salaries of employees, raw materials needed to produce the product, and fees to cover the marketing of services
[yes, word of mouth is good but when you have mouths to feed, you just can’t wait a few years to get the word out].
Most small and medium businesses will find themselves strap for cash because your suppliers want to be paid. More often, your customers will not pay you in advance for products or services rendered unless yours is a cash business only. Many businesses aren’t.
You eventually come to the point where you have a lot of money in the form of receivables, growing debt you have to pay to continue doing business, and not enough cash on hand or cash in the bank.
What do you do?
For most businesses, the traditional strategy is to go to a bank to get a loan. But there is a catch. If your business is less than three years old, your bank will politely say “no”. If you don’t have collateral your bank will also say “no”. And if you don’t have a private banking account in that bank, your bank will also say “no”. Some would go to what is colloquially referred to as your neighbourhood loan sharks but that’s another story.
There is an alternative.
In the period following the financial crisis of 2008-2009, investors or people with excess cash, have felt distrustful or dissatisfied with their banks and have thus started to look for alternative investment options.
One such alternative is called invoice financing (also referred to as invoice discounting) – where a company’s receivables are sold (some say bid upon) on a trading platform. The seller gets access to the funds to complete his business. Once he gets paid the buyer or buyers (in case the amount is shared among multiple buyers) will be paid back what they are owed with interest.
Gianluca Pizzituti, ceo and co-founder, Velotrade
In discussing the business of invoice financing, Gianluca Pizzituti, ceo and co-founder of Velotrade, told FutureCFO that SMBs are just one of three groups of companies and people who would prefer other alternatives to banks as sources of funds or investment opportunities.
Watch the full video to learn more about the Velotrade platform, as well as the prospects for the invoice trade finance marketplace in 2020.
Pizzituti noted that there is interest among quarters of banks to pursue this type of opportunity but factors like risk appetite and/or the requirement to re-architect their legacy IT infrastructure to support trade finance make it less attractive.
