This article will explore more on invoice discounting risks, particularly when trading with InvoiceInterchange.

Normal scenario – how Invoice Discounting should work

At InvoiceInterchange, we offer both disclosed and non-disclosed facility to our SMEs. Let’s look at an example of how they work.

A young SME, Jami LTD sells jam to Hotel LTD

1. Hotel LTD orders jam and issue a Purchase Order
2. Jami LTD delivers the ordered jam and issues an Invoice to be paid in 30 days
3. Hotel LTD receives the jam and issues a Receipt Note as a confirmation of receipt

Jami LTD needs additional working capital to order more inventory for their new orders. Jami LTD sells their invoice via our online platform and receives funds in 24 hours in exchange for a small discount on their invoice.

In a disclosed facility Jami Ltd will advise the debtor to pay directly into II bank account when settling the invoice.

On the 30^th day, Hotel LTD makes the payment to InvoiceInterchange, where we then disburse cash back to Investors (advance plus return) and any remaining back to Jami LTD.

However in an undisclosed facility the debtor pays into the SMEs account and it then settles with II

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What are the invoice discounting risks, things that could go wrong

The bottom line risk is that Hotel LTD does not pay up after 30 days. This could be due to:

• Overdue payment – where payment will be made but at later date. It could be due to a myriad of reasons but commonly caused by missed payment cycle, due to some administrative issues
• Disputed payment – where there may be issues with the goods received. For example, quality issues like an incorrect jam flavour was delivered
• Incorrect Payment – payment was made into an incorrect account i.e. back to Jami LTD
• Bad debt – Hotel LTD become insolvent

In an event that Hotel LTD does not pay up, InvoiceInterchange will execute the recourse / repurchase agreement where Jami LTD (SMEs) will repurchase the delinquent invoice. The funds received will then be used to repay the Investors plus returns.

Protecting our Investors from invoice discounting risks

At InvoiceInterchange, in every step of our process, protection of our investors is our highest priority. Our risk control framework is in place to minimise any default. The following are high level processes and procedures that we have in place:

• Strong legal framework: All participants are required to sign our legal agreements (contracts) to ensure all parties are well protected
• Stringent (signing up) on- board processing: All SMEs and Investors go through strict assessment during the on-board joining process to filter out applicants who are outside our risk profiles
• Verification process: InvoiceInterchange verify sales contracts between SMEs and their customers as well as verifying invoices against third party documents before they become available for investors to purchase
• Facility limit: We set a facility limit based on the SMEs’ revenue and their existing facilities with other parties
• Advance rate: To further protect investors the advance amount will not exceed 90% of the invoice value