Due to the financial risks resulting from delayed payments, companies have been exploring new ways to get cash as soon as possible. This has led to the rapid growth in the invoice trading market in Asia-Pacific.
There is no question that late payments from buyers represent a hazard for any growing supply chain. The constant pressure on a company’s working capital could mean more than the difference between profit and loss: over a fifth of corporate insolvencies in the UK were due to delayed payments for goods and services, according to the Association of British Recovery Professionals.
In China, there has been an increase in long-term overdue payments. From 2015 to 2016 the number of corporates experiencing average payment delays of between 90-119 days increased by 25% (from 21% to 26.3%), according to a survey of Chinese corporates, conducted by Coface. The survey also shows that corporates dealing with overdue payments of 150 days or more grew by 60% from 2015 to 2016 (from 9.9% to 15.9%).
The pressure from the risk of delayed payments have given rise to alternative financing models such as balance sheet lending and P2P lending.
One particular model that has grown in prominence is invoice trading. Under this financing arrangement individuals or institutional funders can purchase invoices from a business at a discount. This, in theory, can lead to greater transparency and flexible payment terms.
Invoice trading has experienced rapid growth in use as a commercial financing tool. In Asia-Pacific (ex-China) invoice trading volume grew from almost nothing in 2013 to a US$116.95 million market in 2015, as noted in the Asia-Pacific Alternative Finance Benchmarking report. Within China, invoice trading in 2015 represented a US$1.46 billion market compared to only US$25.59 million in 2013.
Wanting to take advantage of the business opportunity, several invoice trading platforms have emerged in Asia, including Capital Springboard in Singapore and Qupital in Hong Kong. Qupital, an online invoice trading platform for receivables financing, made headlines this March when it became the first Hong Kong-based fintech to receive funding from Alibaba.
While invoice trading aims to reduce working capital pressure, users of this service must be aware that due diligence, underwriting and credit risk control on these platforms may not be up to regulatory standards. Wangdaizhijia, a Chinese P2P company, reported 1,263 ‘incidents’ in 2015 up from 92 in 2013. P2P platform Ezu Bao became infamous in China after authorities discovered that executives were running a ponzi scheme.
China is the largest online alternative finance market globally with a transaction volume of US$101.7 billion in 2015, representing around 99% of the total volume in the Asia-Pacific region, according to the Alternative Finance Benchmarking report.