Patrick Manasse, CCO at MonetaGo shines a light on the inefficiencies in invoice financing that make double financing a real risk. This in turn, makes it more difficult to get much needed cash to SMEs that need it the most.
The coronavirus outbreak has seen a spate of government-led initiatives to get cash to struggling businesses. From the British Business Bank’s coronavirus bank incentive loan scheme (CBILs), to bounce back loans, governments all over the world have stepped up to deliver emergency cash to struggling companies. This new lending activity has amplified and increased the risk and incidences of financial fraud. In April this year – the first full month of lockdown – fraud rates across all financial products rose by 33%.
Fraud is particularly acute in invoice financing, which includes risks such as double financing, invoice authenticity, and tracking of underlying goods. The total value owed to firms around the world in receivables financing is worth around 20% of global GDP. That amounts to a staggering 21.9 trillion pounds. Despite its enormous addressable market, invoice financing remains an antiquated, inefficient, and largely paper-based process. This means that although it is a valuable source of liquidity and an integral part of keeping trade running smoothly, invoice financing is particularly susceptible to fraud.
The efforts to bring trade finance into the digital era have been spurred on by the additional challenges brought on by Covid 19. However, the process underpinning letters of credit and invoice financing are still, for the most part, archaic.
This type of massive fraud reinforces the crucial need to digitise the trade finance sector, which is worth $10 trillion a year. It is a huge liquid market that needs modernisation. Blockchain technology in particular is capable of providing an immutable decentralised ledger that can be accessed by many different participants and which can be used to eliminate the risk of fraud in invoice financing. By taking select information from invoices, hashing them so they can’t be used to obtain primary customer information, and then uploading them onto on a shared distributed decentralised ledger, it is possible to prevent duplicate financings in real-time while at the same time protecting sensitive information related to clients and market share.
Since the data can be securely shared between all network participants, the distributed repository prevents duplicate factoring by the financier prior to trade confirmation. It is also possible to automatically validate the authenticity of invoices by checking the information against available tax information associated with each invoice. In other words, this type of system can eliminate the risk of fraud in trade finance entirely.
Although the pandemic has brought emergency stimulus measures to help get cash to businesses, traditional invoice financing and trade finance routes remain a critical component to secure liquidity. As the future of the UK and all economies around the world remains unclear, there is a stronger case than ever to ensure that the processes underpinning financial services are robust, and in particular with invoice financing which requires urgent modernisation.
Research carried out earlier this month by Bibby Financial Services shows that SMEs wrote off over £20,000 on average during the pandemic as lack of cash flows impacted supply chains. Especially in situations such as these, invoice financing is a vital tool that can help small businesses maintain healthy liquidity positions. As such, it is urgent that the invoice financing process operates smoothly which clearly is not the case at the moment.
The pandemic and ensuing disruption it has brought has forced introspection for businesses around the world. Inefficiencies that have long existed but been allowed to permeate processes should not continue to be acceptable. Moreover, there is no longer any reason that these issues should have to exist when there is technology that is readily available to increase the security of these transactions.
Small businesses have always been the backbone of the economy and it is hugely important that they are given access to the cash they need to survive especially in times such as these. The effects of the pandemic on the UK’s small business community have been well documented and it is no secret that many are struggling. Invoice financing is an essential element for many small businesses and it is crucial that the financing process is made secure and efficient in order to support them.
Unfortunately, in its current state, invoice financing remains largely paper-based leaving it susceptible to fraud not to mention being hugely inefficient. However, this type of factoring is one of the oldest forms of financing in the world and will surely remain an option for lenders and borrowers well beyond the pandemic. But it is time we reform it for the better. The good news is the technology is ready and has already been implemented in other countries.
Patrick is Chief Compliance Officer at MonetaGo. In this role, he ensures MonetaGo is compliant with existing regulations. He is an attorney and member of the New York Bar who has focused much of his career on cross-border commercial transactions