What Is Invoice Trading?

Invoice trading is a little known alternative way to manage cash flow. In brief, an invoice trading platform allows businesses to sell invoices so as to free up cash.

In this post, we’ll discuss what is invoice trading, how it works and the pros and cons of using it as a way to access cash.

Invoice trading explained

Invoice trading is a means by which companies borrow money from investors through unpaid or overdue invoices. Effectively, the invoices serve as a guarantee of payment. This finance option is facilitated by Invoice Trading platforms, which allow companies to sell invoices to online investors.

The invoice trading platform brings together companies with cash flow problems with investors seeking short-term investments. It is sometimes known as the invoice exchange platform.

Invoice trading is also sometimes called peer-to-peer lending, invoice finance and invoice discounting.

How does invoice trading work?

First, a business must apply online and wait for an approval by a member of the invoice trading platform. Once approved, a client bank account is created and the business may then proceed to sell invoices on the platform.

The invoice trading platform verifies each invoice electronically before it is sold.

Investors can purchase the whole invoice, or parts of it.

The business will receive 90% of the invoice value in their account within 24-48 hours as an advance.

Once the debtor pays their invoice, and the client receives it in their bank account, then the invoice trading platform releases the rest of the balance to the business, minus any fees.

Pros of using invoice trading

From a business and investment perspective, there are many pros to using invoice trading platforms.

Firstly, it allows businesses to access money rapidly, usually within a time frame of 48 hours. It’s also very easy to access the funds, as it all takes place online. Compared to the various conditions surrounding more traditional business loans and funding schemes, invoice trading is a much more convenient alternative.

From the point of view of an investor, it’s a secure and easy way to earn good returns on investments.

It also negates the need of business owners to keep close track of the status of their invoices and chase after customers who are late paying. With invoice trading, it is then up to the invoice trading platform to complete this irksome task.

Finally, invoice financing is quick and easy to qualify for. As long as you do not have serious financial issues in your company, and your customers are reliable at paying, you can expect to qualify.

Cons of using invoice trading

Invoice trading can be expensive. This is because there are charges involved in using the services, such as credit check fees, application fees and processing fees. This can total 5% of an invoice’s total, which can be a considerable sum.

When dealing with debts, it can be unsettling to hand over control to an external service provider. Business owners also might be concerned that invoice trading services will contact their customers directly as this risks damaging the relationship you have with your customers.

Invoice trading is only available to you if your customers are other businesses and commercial invoices are concerned. If your customers are the general public, then invoice trading is not a viable financing option for you.

Invoice trading is a solution to the problem of insufficient cash-flow, and not other financial problems in a business. If your customers are reliable, pay their invoices on time and have reasonable payment terms, then you do not stand to gain much from invoice trading. If you’re looking for capital to fund the purchasing of new equipment, for example, then other financing routes may be more appropriate to your situation.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.