Innovating Invoice Financing: The Future is Now in Latin America
As part of our Best of 2016 series, we are re-publishing some of the top articles from the past year.
Around the world, small and medium businesses (SMEs) are the engine of economic growth and employment. Given the importance and market potential of SMEs, a variety of new fintech players have begun providing much-needed debt capital to a sector excluded from many formal financial services. There is a global SME credit gap of $1 trillion, and within Latin America there is an estimated gap of $250 billion, with 2 million SMEs reported as unserved or underserved.
As new financing opportunities emerge to fill this gap, we at Accion Venture Lab and Quona Capital have seen interesting growth in startups innovating within the invoice financing space, more specifically in the well-established and expanding form of SME financing known as factoring. These startups include companies such as Bluevine, Fundbox, Finvoice, and Taulia in both the U.S. and Europe. Through our experience with strategic partners and startups in the sector, we are particularly excited about developments in Latin America, where regulators throughout the region are advancing a progressive financial policy shift unseen elsewhere on the globe. As a result of mandating the use of electronic invoicing (e-invoicing), which enables the digital recording and verification of invoices for tax purposes, Latin American regulators are facilitating the emergence of digital solutions within financial services to help resolve the SME finance gap. We believe that regional policies such as e-invoicing are laying the rails for innovation in Latin America, resulting in an incredibly unique environment to build the future of digital invoice financing for the underserved.
What is factoring?
Factoring allows suppliers of goods and services to satisfy working capital needs by selling a percentage of their invoices at a discounted price to lenders (or “factors”) for cash. These specialized financial firms called factors calculate their discounted price offers based on suppliers’ credit, invoice validity, and the reputation of the buyer. After buying the invoices, the factors are paid the original invoice balance by the buyer of the goods or services at a later date. Factoring offers suppliers a way to eliminate the need to use high-cost financing options like asset-based lending to obtain cash liquidity and stronger balance sheet positions. It also mitigates the uncertainty surrounding the timing and amount of payments, allowing for superior cash flow forecasting capabilities.
Reverse factoring operates similarly to factoring, except that larger buyers guarantee payment of the invoices to lenders, and they negotiate credit lines that are made available to their suppliers for invoice financing. Reverse factoring is a more recent practice than traditional factoring; however, it is significantly more beneficial to SMEs, as the terms of the invoice financing are based on the credit of the buyer rather than the supplier. Because buyers typically have better credit than their suppliers, reverse factoring allows suppliers to access enhanced credit and terms that they otherwise would never have.
Latin America leading the innovation
As The Economist noted, “neither tax collection nor technology is an area in which one would expect Latin America to be a global trendsetter. But when it comes to mandatory e-invoicing—that is, forcing buyers and sellers to register invoices with the tax authorities electronically when a transaction takes place—the region is blazing a trail that others, from the European Union to China, are considering following.” This simple requirement has opened the flood gates of innovation, and there are many tech-enabled factoring and reverse factoring business models that embrace these e-invoices emerging in Latin America. The region is taking shape as a global leader in invoice financing, with Chile, Brazil, and Mexico already mandating e-invoicing and Guatemala, Ecuador, Uruguay, and Peru not far behind.
E-invoicing enhances transparency and efficiency of invoice processing. It removes manual invoice processing costs, decreases time needed to send and receive transaction information, and reduces exposure to risks historically associated with manual processes, such as fraud. This technology has allowed factoring and reverse factoring businesses to dramatically decrease approval and processing times, a key value-add for SMEs with imminent liquidity needs. Additionally, because of a reduction in transaction costs, digital invoice financiers are able to serve SMEs typically deemed too small and unprofitable for traditional factors.
Startups jumping on the opportunity
Unsurprisingly, startups have seen e-invoicing as a huge opportunity to build better and faster invoice financing platforms. A few companies we have seen that are trailblazing in this space are:
- TREFI (Peru) – The TREFI platform allows fiduciary agents to purchase SME’s accounts receivable at discounted rates while managing the risk held between the SME’s and the fiduciary agents, thereby strengthening the SME’s liquidity and enabling it to extend credit to its clients.
- Mesfix (Colombia) – Mesfix is a marketplace that connects investors with SMEs wanting to sell their invoices and allows for multiple funders to finance a part or all of a certain invoice.
- Innovafunding (Peru) – Innovafunding is an invoice discounting marketplace that connects investors with SMEs wanting to sell their full invoices.
- Facturedo (Chile) – Facturedo allows SMEs to participate in auctioning their invoices in an easy, flexible, and fully online manner. Buyers will bid their invoices between investors to, ensuring the best pricing option.
- InvoiNet (Argentina) – Invoinet is an open marketplace for reverse factoring electronic invoice financing. It connects suppliers and buyers with multiple lenders on a collaborative platform for electronic invoice management and financing.
- E-Factor Network (Mexico) – E-Factor Network is a platform that enables electronic factoring services for participating suppliers who wish to discount account receivables.
We here at Accion Venture Lab and Quona Capital are convinced that some of the brightest innovation and strongest players in this new digital invoice finance space will emerge from Latin America. We are excited about these companies because they bring many of the exciting elements of fintech and financial inclusion into play: combining both data analytics and seamless user experience with enhanced credit accessibility for the underserved.
Jackie Hyland is an investment associate at Accion Venture Lab.
Adam Hartmann is director of operations at Quona Capital.