How is MarketInvoice trying to turn the working capital finance industry on its head? Jason Hesse investigates.
Seventy-seven per cent of UK SMEs are affected by late payment. More than £200 billion worth of invoices are processed through factoring and invoice discounting each year. How does MarketInvoice hope to crack the market?
MarketInvoice is an online marketplace that allows companies to sell their invoices to external investors. As invoices are auctioned online, buyers compete for the opportunity to advance cash. In turn, this competition drives down the cost for the selling companies.
The company’s addressable market is large. As banks restrict their lending, the demand for invoice finance is growing. MarketInvoice co-founder Charles Delingpole says the company is not trying to become an invoice finance provider, however: “Ninety per cent of our clients have never used invoice finance. We’re not trying to provide factoring or invoice discounting in the traditional sense, we’re trying to change how companies finance their working capital.”
The differences between MarketInvoice traditional invoice finance is flexibility and competitive pricing, he adds. “There is no contractual lock-in to use MarketInvoice, companies may auction whichever invoices they choose. In invoice discounting, companies normally have to sell all of their invoices.”
Pricing is another key differentiator for MarketInvoice. The company charges just 0.5 per cent of the invoice amount to the seller, and 20 per cent of the buyer’s return (i.e. if an investor charges 1.88 per cent on advancing the cash – the average rate charged – MarketInvoice will skim 20 per cent off this 1.88 per cent).
How does the platform work? A company registers with MarketInvoice and selects which trade debtors and invoices it would like to finance (usually blue-chip companies). These invoices are then put to auction.
Auctions, which usually last two days, will see buyers place bids, offering what percentage of the invoice they will finance and at what discount rate.
Once the company selects which investor to go with, cash is transferred to the company through MarketInvoice. Finally, when the debtor pays the invoice into the client account, the company receives the remainder of the invoice amount minus any fees.
“Banks are reducing overdrafts and the amount they will lend and large debtors are taking longer to pay invoices to small businesses. It isn’t unheard of companies having to wait 100 days to be paid. This means that SMEs are caught in a double credit crunch. Yet rather than having to wait to be paid, companies can put their invoices on our platform and get cash immediately,” explains Delingpole.
The service operates on a confidential basis, therefore a company’s debtors are not aware that their debts are being financed.
Buyers on the platform are a mix of high-net worth individuals, hedge funds and other institutional investors from around the world. Only self-certified sophisticated investors may bid on auctions.
They are given access to information on the seller, such as the company accounts, its balance sheet and debtor ledger; details of the invoice, which has previously been verified by MarketInvoice; information on the debtor, which tends to be a large, listed corporation; and the company’s history on MarketInvoice. “A company’s first auction is the riskiest. Once it has used us for a while, the risk declines,” says Delingpole.
Sellers are generally UK-based small businesses that sell into large UK corporations.
The company does not have any direct competitors in the UK. The closest thing to competition are peer-to-peer platforms, such as CrowdCube or Zopa, and even then, Delingpole does not consider them competition as they focus on a different market. In the US, there is one company, The Receivables Exchange, which does operate the same model as MarketInvoice, but it is not an international business.
MarketInvoice was founded by Charles Delingpole and Anil Stocker, who both left their jobs in 2009 to start the company. The pair met while studying at Cambridge.
This isn’t Delingpole’s first business. While at Cambridge, he founded TheStudentRoom.co.uk, now the largest UK student community website.
Prior to MarketInvoice, Delingpole worked in J.P. Morgan Cazenove’s corporate finance team, while Stocker worked at Lehman Brothers and investment bank Cogent Partners. While Delingpole is responsible for marketing and technology, Stocker looks after partnerships and business development. The company’s chief technology officer is Ivan Zlatev, a former software engineer for IBM and Novell.
MarketInvoice employs 13 people in total, working as developers, marketing and sales people.
The MarketInvoice auction platform was built in house, using C#, ASP.NET and MySQL.
“It isn’t a low-latency bond trading platform,” explains Delingpole. “Because we deal with money, we needed to build it so we can easily keep track of where money goes – it cannot just go astray. We established rigorous rules.”
The website is designed to make it easy for users to display information and for investors to make bids. “We’re using a lot of financial technology, keeping attention to ledger entries and the ways in which the auction bids occur,” he says.
There are anti-sniping measures in place to ensure auctions are fair, and it is easy for the firm to look at the history and analyse each auction.
The back-end of the website is hidden from public view. Users are only given access once they have been screened and vetted. Users are checked to minimise money laundering and fraud as much as possible.
“Access isn’t straightforward,” says Delingpole. “We take ID off our users and also use various databases to check for any fraudulent history, their credit history and whether there are any County Court Judgments in place. Every piece of information is useful to us. Not everyone can just sign up to the platform and place a bid.”
In the future, Delinpole expects that the process will become more automatic. The company is trying to build a system to automate the checks, pulling data from various sources into a single file. “We want to be more technology driven, this will be important for us when we scale,” he adds. “But it takes time and investment.”
Using MarketInvoice, companies have already auctioned £12.5 million worth of invoices. The company is growing quickly. In February 2011, MarketInvoice had processed £40,000 worth of invoices; in February 2012, it processed £3.5 million.
On average, each auction attracts five bids. Average auctions range from £50,000 invoices to £400,000m but the company has held two £1 million auctions since launching. There have been no failed auctions yet; everything that has gone to auction has been funded.
There are 85 companies that currently use MarketInvoice, and 35 buyers are signed up. “We have no problem finding buyers; they find us. The tough thing for us is finding sellers, which is our main focus now.”
Delingpole says the company’s goal is to significantly grow volume this year: “We have serious marketing plans in place to scale the business. Marketing to SMEs is difficult, but we’ll crack it.”
MarketInvoice’s greatest source of leads is currently PR. Delingpole says he and co-founder Stocker spend a lot of time doing media work to raise awareness of the company. “A lot of newspapers and media outlets want to talk to us about how we are trying to change working capital finance, but it’s challenging. It isn’t an easy way to raise the company’s profile.”
Companies that sell invoices on MarketInvoice tend to have large, blue-chip customers which pay late.”It’s a real mix,” says Delingpole. “We get recruitment, media, creative, fashion, tech companies… a lot of Shoreditch-based firms.”
The company was seeded with £650,000, including funding from angel Martin Gill, Body Shop entrepreneur Ivan Levy and serial entrepreneur Rumi Verjee. Delingpole says that the company intends on raising another round of investment “within the next few months”.
As well as operating in the UK, MarketInvoice has a limited entity in Hong Kong. Delingpole explains: “It isn’t as straightforward for us to do business there, but we want to grow in Hong Kong. As well as having a legal system similar to ours, it has a large volume of exports. We already know MarketInvoice would work well there as we’ve already signed up clients.”
The main focus, however, is to grow in Britain. “There are thousands of companies out there that can use us to help manage their cash flow. With the banks leaning less and increasing their rates, the opportunity for MarketInvoice is huge. We just need to get the word out.”