Key Takeaways
- Invoice trading allows small businesses quick access to liquid funds by selling their outstanding invoices to investors.
- It only takes anywhere between 24 and 48 hours for debtors to get their funds once their invoices are sold.
- Investors, wealthy individuals, and asset managers sign up for online platforms that allow invoice trading. They can select multiple invoices or a portion of them as short-term investments.
- Invoice trading is a much more attractive option for small business owners who are not able to meet the requirements of traditional lenders.
- In invoice discounting, you sell your invoices to a discounting company. You are committed to paying off your debts to one account. On the other hand, invoice trading allows you to pre-select which of your invoices you want to auction off or what portion you would like to sell.
If you’re like many businesses, you may prefer an alternative financing solution that doesn’t require a long-term contract. This is why invoice trading has become a popular choice: it allows companies to sell their invoices to investors through online platforms while eliminating the tedious loan application processes required by traditional lenders.
In this article, we’ll deep dive into the ins and outs of invoice trading and why it’s a sought-after alternative financing solution for small-scale businesses. If you’re already familiar with peer-to-peer lending, you most likely know the principles of invoice trending. If not, we’ll break it down for you.
What is Invoice Trading?
Invoice trading, sometimes referred to as auction-based invoice financing, is a modern funding solution by which a company sells invoices via online platforms to increase its capital or improve cash flow. Some small business owners do this to connect with investors looking for short-term returns.
Essentially, business owners borrow money from investors and use their invoices as collateral. Investors pay in advance for your unpaid invoices so you have enough funds to allocate for your business expenses, like paying outsourced talent, repaying debts, or replenishing your inventory.
How Does Invoice Trading Work?
Similar to how peer-to-peer lending works, invoice trading allows you, as the borrower, to auction off your overdue invoices to investors on an online trading site. Usually, these platforms have a community of investors, which is largely made up of hedge funds, asset managers, and other wealthy individuals who are interested in short-term investments and pay you in advance for a certain interest.
The platform will verify your invoices before making them available for auction. Once your invoices are verified, they will be sold to the site, allowing multiple investors to buy portions of the invoice. At present, these online trading sites integrate directly with your payment processing systems, automatically verifying invoice statuses to speed up funding.
How Can Borrowers Benefit from Invoice Trading?
Invoice trading allows quick access to funds without the stringent loan application process. You can receive an advance rate of up to 90% of your invoice’s total face value in as early as 24 hours. On top of that, you can select which of your invoices you want to sell and when, instead of committing your whole ledger (like in other invoice financing options).
How Does Peer-to-Peer Lending Work?
Peer-to-peer lending allows borrowers to reach investors who loan money to qualified applicants directly. Some new company owners choose this route, especially when they don’t have the requirements to borrow from banks or credit unions. Each website sets the rates and terms, which are often recommended by investors who are part of the community.
What’s great about peer-to-peer lending sites is that they allow small business owners to choose from various loan options with competitive rates at low charges. Investors don’t discriminate based on the reason for selling the invoices. They lend money to everyone they deem to have favorable credentials and proof of paying back the loan.
Invoice Trading vs Invoice Discounting: What’s the Difference
Before diving into how invoice trading differs from invoice discounting, let’s define invoice discounting first.
Invoice discounting is a common form of invoice financing where a business uses its unpaid customer invoices to access working capital. You don’t technically sell the invoices—you’re borrowing against their value. Lenders typically advance around 80–90% of the invoice amount, and you repay the balance (plus fees) once your customers pay.
In most cases, invoice discounting is confidential, meaning your customers aren’t notified. However, approval can be more difficult for small businesses. Many lenders prefer to work with larger companies that already have established credit control and accounting systems in place.
Invoice trading, on the other hand, is typically done through an online marketplace. You list your unpaid invoices, and individual or institutional investors purchase them, either in full or in parts. This gives small business owners and newer companies more access to funding without relying on traditional lenders. With invoice trading, you usually remain responsible for collecting payments, so your customer relationships stay intact.
Invoice Trading vs Invoice Factoring: What’s the Difference?
Invoice factoring is somewhat similar to invoice discounting, except that the invoices are sold to an invoicing company, which will then be in charge of collecting your customers’ payments.
To distinguish the two better:
- Invoice discounting: You retain full control over your sales ledger and customer relationships. You’re responsible for collecting payments from your clients, so they won’t know a third party is involved. The lender advances a percentage of your invoice value (typically 80–90%), and once your customer pays, you repay the lender along with any agreed-upon fees. Since you’re managing the collections, you also handle the related accounting and reconciliation tasks.
- Invoice factoring – You sell your invoices to a factoring company, and they take over the collection process. This means your customers will be contacted directly by the factor, so they’ll be aware of the financing arrangement. While you give up some control, you save time on chasing payments, allowing you to focus more on running your business.
Now, what makes invoice factoring different from invoice trading?
Invoice trading takes a more hands-off approach for the platform. Instead of a factoring company managing collections, you list your unpaid invoices on an online marketplace. Individual investors or institutions can buy your invoices (or portions of them), and you receive funds based on the agreed terms. You continue handling collections, so your customers aren’t contacted by a third party. This lets you maintain direct relationships with your clients.
How to Get Started with Invoice Trading
If you are looking for an alternative financing solution that will give you the funding you need ASAP, then you should definitely explore invoice trading. To start, you need to register with invoice trading platforms like Incomlend (based in Singapore), Finanzarel (based in Spain), and RatePay (based in Germany).
Compared with traditional lenders, you don’t have to worry about hefty credit check fees, and your business doesn’t have to be in operation for several years. You also don’t need to provide collateral. They are only looking for small to medium enterprises operating for at least six months, and the debtor has a favorable credit rating and history.
After a mandatory background check, you can start posting your invoices for auctioning on the site. The platform will verify the validity of your invoices before releasing them for bidding. Once they’re released to the marketplace, online investors can start bidding on a portion of or your total invoice amount. The bidder with the highest price offer wins the invoice.
When investors purchase your invoices, the platform transfers the proceeds to your account within 24 to 48 hours. To pay it back, you have to settle your invoices by paying directly to the platform’s account. Upon confirming your payment, the platform sends the investor’s capital with their returns. For remaining balances, the funds will be remitted back to you minus the service charges and other fees.
Invoice Trading Rates You Can Expect
In invoice trading, you can expect your rates to be around 1.8-2% per month. Depending on your credentials, your customer’s payment terms, the quality of your invoices, the platform you signed up with, and the diversity of the invoice traders from the platform, rates could come down anywhere between 1.25% and 1.75% per month. In some auctions, interest rates could even go down as far as 0.30-0.50%.
Is It Time to Sign Up for Invoice Trading?
When money is tight and you need capital to fund specific needs, such as business expansion or purchasing new equipment, invoice trading can be beneficial to your business. Why? You can sell a portion of your outstanding invoices if and when you need to, without contracts or any other form of commitment. There are no lock-ins, either.
Cash is sent to your account almost overnight after the auction closes. There are huge opportunities in invoice trading, especially when you want to have access to liquid funds. Just a rule of thumb: do your research before signing up for just any invoice trading platform. Be open about your options and weigh the differences between each platform you’ll find online.
Conclusion
Invoice trading has emerged as a game-changer for small businesses looking for a quick solution to their cash flow problems without the hurdles of traditional loans. With competitive rates and no long-term commitments, turning unpaid invoices into working capital has never been easier.
However, not all platforms offering invoice trading services are created equal. Finding the right partner can differentiate between seamless growth and delays that can cause serious financial issues.
Let us help you optimize your cash flow with our invoice financing solutions tailored to your business needs, with transparent rates and quick approval times. Contact us today to learn more!
