The events of recent years have given a great boost to the digitization and automation of financial services, giving more and more space to the Fintech world's services, which now occupy a central role in the business world.

A term that refers to technology applied to the financial world, the Fintech ecosystem enables the automation of traditional processes, increasingly reducing their timeframes and simplifying the financial instruments available to SMEs.

Alternative finance is moving within the market, working alongside traditional players to offer consumers new financial services and instruments.

Alternative finance and cash flow management: from Factoring to Invoice Financing

Against this backdrop, it is crucial for Fintech and Insurtech companies to recognize the main problems that plague SMEs and may prove to be a threat to their operations.

Cash flow management is one of the problems encountered by companies. In this context, invoice financing has its place. But what is it?

In an article some time ago, we had already discovered how Factoring works: it is an operation whereby companies can assign their existing invoices or future receivables to a specialized operator before they fall due. In this way, companies can immediately obtain the cash liquidity they need to continue with their business by assigning their invoices at a cost that depends on the credit risk inherent in the transaction and the entity on which this risk falls in the event of late payment or insolvency.

What about invoice financing?

Unlike Factoring, Invoice Financing (or Invoice Trading) is a service offered by Fintech platforms through which companies can sell their invoices to specialized investors.

Due to the timeframe for collecting invoices in Italy, which exposes companies to the risk of no longer being able to meet their financial obligations to banks, these web platforms help companies to sell their existing invoices for a fee of around 85-90% on the amount from investors. In turn, the investors receive a percentage against the transaction.

Moreover, thanks to the use of Fintech platforms, the timeframe for debt collection is significantly reduced, allowing the assignor to obtain the necessary liquidity immediately.

There are generally two types of contracts offered:

• Non-recourse contract, where the assigning company is not liable for the insolvency of the debtor, and the assignee bears the credit risk;
• Contract with recourse, where the credit risk remains with the assignor, who must answer for any debitor's default.

In order for companies to assign their invoices to certified investors, investors analyze several factors before proceeding with the transaction, including the creditworthiness of customers and the existence of negative events affecting the assignor or debtor.

Once the assignor chooses the preferred assignment's mode, it will be sufficient to approach specialized platforms where investors submit their offers based on a previously agreed auction base.

As we have seen, Fintech offers more and more services to meet SMEs' needs, speeding up timelines and simplifying financial processes. In one of our next articles, we will take a closer look at the Fntech situation in Italy. Don't miss it!