Invoice financing: growth market in 2017
A key finding of the 2016 Asia Financial Forum is the recognition that de-risking measures and reluctance by banks to offer loans to small and medium enterprises (SMEs) are being the growth of shadow banking in Asia. New research by McKinsey and IFC found that 70% of the micro, small and medium enterprises (MSMEs) in Asia do not use any external financing from formal financial institutions, and another 15% are underfinanced from formal sources.
Much worst the reality of day-to-day business means that efforts by large enterprises to curtail spending have the knock-on effect of forcing creditors, including SMEs that supply everything from temp jobs, cleaning services, office supplies, etc. to extend credit terms that often prevent SMEs from expanding or investing.
New trends suggests that SMEs are learning to tighten credit terms with their debtors, effectively constraining the credit terms that other businesses, including SMEs, can get from their suppliers. The result is cash-flow crunch for many SMEs forced to pay their suppliers faster than usual.
One option that is increasingly becoming an option for SMEs seeking to get access to much needed cash is invoice financing. While debt collector agencies have long existed to the chagrin of both debtor and creditor, technology is enabling platforms that facilitate more transparent and mutually equitable options for SMEs to gain access to much needed cash.
Fintech Innovation spoke to Roger Crook, founder and CEO of Fintech startup Capital Springboard, on the topic of invoice financing for SMEs in Asia.
Why is there an increased interest around invoice financing?
Roger Crook: Invoice financing is really a need for SMEs because they are looking for cash to be able to grow faster. As you know they want cash to finance their business but are unable to borrow from banks because of their start-up situations.
The peer-to-peer marketplace creates a place for investors to finance these SMEs is a perfect world for them. They are willing to pay higher discount rates to be able to get cash in a very fast way.
What’s in it then for the investors who are coming? Why would they be interested in taking the risk of taking an invoice or the odd chance that payables, the guy who owes the money will actually pay?
Roger Crook: I think why the investor is interested in investing is because the returns are good. Secondly, it comes down to how good is the quality of the investment. We do a lot of credit checks on the SME companies and on the debtors of the invoice. We grade each invoice, each company, based on their credit-worthiness including whether we’ve got a personal guarantee from the owner of the business and whether we’ve got a nominated bank account so that the debtors pay directly into the bank account.