Trade finance gradually developed a complicated reputation in recent years as FinTech and alternative lending innovation opened availability of various means of financing B2B transactions to more businesses, both large and small. Some avenues, like factoring, involve a supplier waiting on payments to sell an invoice to a financier at a discount. Others, like supply chain financing, involve the corporate buyer initiating the invoice funding process on behalf of the vendor.
Either way, the end-goal is the same: to offer a win-win situation for both B2B buyer and seller, allowing vendors to receive funds on outstanding invoices more quickly while still giving time for the buyer to settle the bill.
But some critics of these finance tools argue that they perpetuate the nasty practice of deliberately withholding payment from small suppliers and forcing those vendors to accept discounts on the full amount of the invoice. For opponents, trade finance can act as merely a bandage, not a cure, to the challenge of late B2B payments.
Yet even with healthier payment term agreements, supporters of trade finance solutions agree that invoice financing can play an important part in promoting the cash flow health of global supply chains. Patrick Pfaff, director of Commercial Banking Clients at French bank ABN AMRO, agreed, and told PYMNTS that a responsible approach to invoice financing can fill a significant, unmet need for capital among the smallest traders.
ABN AMRO recently stepped into the invoice finance arena with the rollout of its Snel Betaald solution, allowing small to medium-sized businesses to finance 90 percent of their selected invoices and receive that funding in their account within one day (the remaining 10 percent is deposited once the debtor pays the invoice). According to the bank, businesses pay an average fee of 2.4 percent for each invoice, though it can be as high as 4 percent.
According to Pfaff, the solution is especially helpful for smaller businesses that lack the ability to access other financing products, “either because they are still too young, or because they are not yet showing a solid financial performance.”
Invoices, on the other hand, are “the one thing they often do have,” and can be valuable assets to growing businesses. The bank deploys automated risk analysis to address the threat of trade finance fraud and fake invoices, assessing the document against data-driven patterns and parameters while also verifying the invoice with the debtor themselves.
For small businesses in need of a working capital boost, invoice finance can be an important way to support financial health.
“By immediately cashing the receivable,” said Pfaff, “they get not only security over the payment, but can invest that money immediately to run their business, pay creditors, pay salaries, taxes or invest in the growth of the business.”
Part Of A Broader Strategy
Also key to invoice financing is it negates the need for businesses to be concerned about the issue of late payment or nonpayment on an invoice, Pfaff said. Despite growing concern over poor B2B payment practices, Pfaff noted that businesses that use the invoice financing solution tend to have debtors that have agreed to payment terms of between 30 and 60 days, and that those debtors “typically” pay those invoices to the bank on-time.
Even so, a small business that finds itself in an arrangement with a corporate customer continually delaying payment may want to reconsider that B2B relationship, even if an invoice financing solution is available.
While invoice finance may not solve the late B2B payments problem outright, Pfaff said it can still be a useful tool to support healthier cash flow when used correctly and in conjunction with other tools and strategies.
“This product is not solely an answer to a market trend of some corporate buyers extending payment terms or paying later,” he said.
Additional technologies like cash flow monitoring, forecasting and products that can address payments friction and allow for transactions to occur in a variety of ways, like WhatsApp or instant payment rails, can also work in harmony with financing arrangements to ensure a small business’s working capital status remains as resilient as possible.