When most people think of innovation in finance, they think of fintech platforms like mobile money wallets. But new forms of financing can themselves be innovations. One such example of financial innovation is invoice financing.
Invoice financing is a major financial innovation for several reasons. The first is that it diversifies the options of business owners around the world. Rather than rely only on the possibility of bank loans – which has been the dominant form of financing for SMEs around the world – they now have a new form of financing to turn to.
Second, invoice financing (invoice discounting, or factoring) is a much quicker option than other channels. When a business factors their invoice, they can get their working capital in as little as forty-eight hours, compared to up to several weeks or even months for other forms of lending. This provides businesses with the working capital they need to succeed.
While invoice financing has already proven revolutionary for businesses in need of capital, the space is still changing. In the same manner that other fintech industries have continued to shift with new technology, so, too will invoice financing. These new technologies will only enhance the user experience for all parties, making invoice financing success even better for platforms, investors, importers, and exporters.
Here are a few trends that will shape invoice financing (or supply chain financing from a buyer’s perspective).
Risk Assessment – Right now, risk assessment of prospective importers and exporters is largely manual. A platform sets its eligibility criteria, the business sends in this documentation and information, and company officers review this material. While they use guidelines and heuristics when making decisions, there are sometimes edge cases that they have to make rulings on. Because of this human element, businesses that should be eligible for invoice financing may get turned down.
The advent of artificial intelligence and machine learning will automate many of these human-driven risk assessments. The submission criteria will remain the same. What will change is that these will largely be reviewed by algorithms. This is a good thing. This will ensure that businesses that deserve invoice financing are eligible to do so, and not turned away for any bias or error on part of the human evaluator. There will be fewer false positives or businesses flagged as being bad candidates for invoice financing than actually are good ones.
The increasing use of AI and machine learning will widen the pool, enabling more businesses eligible for invoice financing to get their fair shot.
Automated investing – On invoice financing platforms, investors can choose to invest in particular receivables or groups of receivables. They can evaluate these receivables by some of the information that the importer or exporter provides at the time of their submission, such as what the receivable is for, who the trading partner is, and how much it is.
From this information, investors can make a case-by-case decision on whether a particular receivable or group of receivables matches their risk appetite. While this process is far more convenient than networking across cities in search of businesses to fund, there is a cognitive load here. Investors have to think about whether receivables fit their risk profile.
Technology will change this too, as it’s already happening on other platforms. On other investment platforms, people can automate their trading strategies, setting parameters for risk, asset type, value, and so forth. This kind of investment automation is bound to come to invoice financing as well, so investors interested in this type of asset class gain the same cutting-edge tool as those on other more traditional investment platforms.
Computer vision – As part of the invoice financing process, importers and exporters submit many documents. Some of these are scanned or photographed copies of actual paper documents, such as manually-issued invoices. Once uploaded, these documents may be difficult for company officials to read, thus delaying the eligibility or approval process.
Fortunately, invoice financing platforms are bound to incorporate some of the computer vision technologies that other fintech already do. In banking, for example, people can now take photos of physical checks to have them credited to their account, sparing the hassle of having to go to the bank to deposit it over the counter.
The convenience that computer vision brings can come to invoice financing as well. Once importers and exporters submit any paper documents, computer vision technologies can extract the pertinent information from them, and do so with very high accuracy. This may seem like a minor benefit, but this will prevent any delays and accelerate the invoice financing process.
Software integrations – A current problem with invoice financing platforms is that they can occasionally be divorced from the rest of an organization’s financial ecosystem. If an importer or exporter successfully factors an invoice, for example, the account team will have to manually record this information in a separate payroll or accounting software. This data encoding is cumbersome, as it boils down to simply moving data from one software to another.
As a result, many invoice financing platforms are breaking down their walled gardens by offering as many integrations as possible to third-party accounting, finance, and other software. These integrations will ensure that companies can seamlessly track their invoice financing without having to move data across different silos.
While these integrations may seem like minor quality-of-life improvements, this will make businesses more efficient in making the most use of their invoice financing. This will be especially beneficial to importers or exporters that will seek invoice financing on a regular basis, as part of their strategy for working capital.
Get in on the ground floor
While these changes are exciting, invoice financing is already a game-changer for importers and exporters bold enough to try out this new form of financing. Businesses would be wise to augment their working capital with invoice financing, so they no longer need to open a letter of credit and experience further efficiencies as the industry matures and grows.