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January 2, 2024


CALLING INVOICE FINANCE PROVIDERS: GROW YOUR BUSINESS AND STEAL A MARCH ON YOUR
COMPETITORS

It's time for finance companies to review the opportunities for growth and risk
mitigation to be had in shifting to Irrevocable Payment Undertakings (IPUs) in
supply chain finance and commercial 'Buy Now Pay Later' (BNPL).

In the August edition of Insight, I wrote about the game-changing Electronic
Trade Data Act (ETDA) and its potential impact on trade finance not just in the
UK but worldwide.

Now, the ICC UK and the Centre for Digital Trade and Innovation have published a
Report entitled: "Seizing the Moment - Unleashing the Potential of Trade
Digitalisation".


IN THEIR WORDS

"This seminal report unveils tangible evidence of the commercial advantages
stemming from digital paperless trade transactions available today. Companies
embracing this opportunity stand to gain enhanced liquidity, risk mitigation,
cost reduction, simplified ESG reporting, ultimately driving improved
profitability and broader market access."

The report gives real-life examples of how businesses have benefitted from
digitalisation. Drawing from these examples leads to a summary factsheet within
the report highlighting, amongst other benefits:

 * 15% increase in profitability
 * Transactions completed in 1 hour
 * Data transfer in 1 min
 * 100% removal of logistics paperwork
 * 18% reduction in shipping costs
 * Liquidity raised 7 days faster

It's imperative that no time is lost in taking advantage of the benefits of
using digital technology in trade and in financing that trade; it's almost a
now-or-never situation. The Electronic Trade Documents Act has made it possible
to get unprecedented benefits on a large scale like never before.




THIS IS ALL WELL AND GOOD FOR INTERNATIONAL TRADE, BUT WHAT DOES THIS MEAN FOR
THOSE BUSINESSES THAT FINANCE SMES?

The EDTA opens the door for finance providers, which currently offer working
capital finance to SMEs, to improve their range of products, reduce risk and
increase profitability.


HOW CAN THEY DO THIS?

Currently, invoice finance companies which offer Supply Chain Finance/Reverse
Factoring/Embedded Finance/BNPL tend to use the purchase of receivables to get
ownership of these assets so that they can advance funds against them.

Onboarding is, therefore, cumbersome, slow, and costly. It requires unencumbered
assignment of the right to receive payment. Depending on which of the forms of
finance above is provided, a debt purchase agreement may need to be signed with
the supplier, legal charges taken, and there is the absolute requirement that
any prior legal charges over the suppliers' book debts are waived in the
financier's favour.

Costs of administration may be high, too, with the need for debt verification,
contractual terms to be reviewed, etc., to minimise risk.

If the financier instead adopts the use of digitised irrevocable promises to pay
– bills of exchange/post-dated cheques in effect – there is no need for charges
to be taken, waivers to be obtained and importantly, as the security for funds
advanced is based on the digitalised promissory note, there is no performance
risk.

Enforcement, if the bill is not paid, is against the business for sums due. And
the risk of non-payment can be, and usually is, mitigated by credit insurance.

And let's not forget that as these promissory notes are negotiable, they can
make funds needed by the financier easier to obtain from banks or other funders.


FIND OUT MORE

Of course, the above is a very brief summary of what is anticipated by the ICC
to be an area of massive growth over the next few months and years, but it is
very important that financiers act immediately so as not to miss a once only
opportunity to get ahead of their competitors.

For a fuller explanation of how adopting IPUs to replace the assignment of
invoices can benefit your business, please email me to arrange a fuller
discussion.

Jeff Longhurst, Consulting Director, Finativ

Jeff.longhurst@finativ.co.uk

Invoice Finance, Trade Finance


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