Funding the future of the digital economy

Invoice factoring has been around for almost as long as people have traded. The practice of using unpaid invoices as collateral for funding can be traced back to ancient Mesopotamia in 1754 BC, when it was mentioned in a Babylonian legal text written on a basalt monument that now stands in the Louvre.

There’s a reason why invoice factoring has stood the test of time so well – and it’s not just because it was engraved in volcanic rock 4,000 years ago. In a commercial world plagued by late payments, it enables businesses to access the money they are owed almost instantly, at the cost of only a relatively small commission.

But if invoice factoring is to survive another four millennia, it needs to evolve. Press coverage of a couple of recent incidents highlights a couple of persistent flaws in the practice.

In November last year, the FT reported that US prosecutors were investigating a group of telcos after a private credit unit of BlackRock claimed it had loaned them hundreds of millions of dollars against receivables that appear to be fake.

A couple of months earlier, First Brands Group, a Michigan-based auto parts supplier, filed for Chapter 11 bankruptcy, its demise attributed to a combination of extensive “off-balance-sheet financing” – including invoice factoring – which concealed the true extent of its liabilities.

The problem is that if the only source of truth in a transaction is a piece of paper that says it happened, it’s all too easy to game the system. A supplier can ask to be paid for a piece of work they did, or for money they spent on a client’s behalf, whether or not they did the work or spent the money at all. 

How transactional-based funding solves the problem
But an evolution is already taking place, in the form of Transactional-Based Funding (TBF). With TBF, invoice fraud is not possible, because the process doesn’t rely on a paper or electronic invoice. Instead, it connects directly into the source of truth the supplier raising the invoice is basing it on. 

This is no small undertaking. It requires the funding provider to be plugged into all the platforms through which the client’s costs and revenues flow.

In the case of a company lending against invoices relating to digital media, this means all the major digital platforms, such as Google DV360, The Trade Desk and Microsoft Advertising, not to mention potentially hundreds more. It’s essential to integrate with them via widely-available public endpoints, and if there is no public endpoint available, to build a bespoke integration, or pull reports that allow you to ingest the data needed to verify a transaction.

Integration with these platforms offers direct visibility of what suppliers are doing, and how much they are spending on their clients’ behalf, and therefore how much they are owed.

The big-business data trail

Media spend is the most obvious candidate, but the same principle applies to creative, or indeed any other type of work. In fact, there isn’t a business of any real magnitude operating today that isn’t operating in the type of data-rich environment TBF requires.

And where a funding provider can see what’s actually happening, it can settle the supplier’s bills within days – or in some cases hours – of them being raised.

Rather than relying on an unaudited claim that a supplier spent £50,000 on media on a client’s behalf, TBF lets us see the data and the actual transaction that confirms the obligation of the payment from the buyer to the supplier. There’s no need to talk to the client to find out if an invoice exists, or if it’s a valid invoice, because we can pull the impression purchase data directly from DV360, which is the billing record of truth.

In other words, the funder is not settling an invoice, but rather, the underlying transaction – which is the ultimate record of truth for the exchange of goods or services between a buyer and a seller.

Which is why Transactional-Based Funding, the natural evolution of invoice factoring, is here to stay.

Also published in: Fintech Bloom