Product Tenets

Three reasons why invoices need Marmalade’s payment-on-demand and not cash flow loans or debtor finance - both of which are lending products that seek to address the timing difference between accounts receivable (AR) and accounts payable (AP) and are largely reliant on invoices as their collateral.


By Luke Trickett

1) Operational Expenses (Opex)

Invoices are used to support certain types of loans, however the proceeds from these loans are often used to pay opex. This is poor use of a loan, as opex should be paid from operating cash flows. The challenge that a small or medium business (SMB) is dealing with and which causes them to look for these (traditional) financial products is a mismatch in the timing of when they pay for inventory and when they receive payment.

With this being the case, the cost to bridge the timing gap should be known and fixed (something which loans cannot offer, due to the invoice’s undefined tenor and depreciating nature). If the need to bridge the time gap is a structural requirement of the SMB, then it’s all the more important that the cost to bridge this gap is fixed, known in advance and built into the Supplier’s price, so they can ‘complete’ the sales cycles (quote through to payment).

Using debt to bridge this timing gap means the SMB will not only struggle to complete a sales cycle, but they will also never have their balance sheet ‘complete’ at any point in time, as it will consistently show the presence of debt, compromising its financial strength.

2) Non-Productive and Depreciating Nature of an Invoice

Not only are invoices non-productive assets, they are also depreciating assets. So to borrow against this asset is a mismatch of the characteristics of the asset and the liability.

Why is there a mismatch? Well on the ‘productive-side’, there is no intrinsic income being produced by the invoice to support the cost of the debt (the only thing invoices can do is convert to cash). On the ‘depreciation-side’, the value of the asset used to borrow against, will on average, reduce over time (given an SMB almost never increases the value after being invoiced, but they may find themselves reducing it or not being paid at all), while the value of the debt (principal and accrued interest) will only grow over time - putting an undefined squeeze on the SMB’s profit margins.

3) Mercurial Collateral

The potential for the collateral (unpaid invoice) supporting the loan to immediately evaporate (because the invoice ages past a certain delinquency or because the Payer defaults), injects a significant amount of unplanned risk into the SMB, as the value of the debt will not likewise reduce in tandem with the collateral’s value. This leaves the SMB scrambling to make up for the lost collateral by redirecting funds away from other expected sales and toward the repayment of the loan - playing havoc with the SMB’s cash flow planning.

Put another way, this dynamic is like a stock that supports a margin loan, immediately falling to zero, causing the investor to receive a ‘margin call’ to come up with some new value to ensure the loan does not have a deficiency of collateral supporting it.

Borrowing against this mercurial asset (invoices), drastically amplifies the risk for an SMB and reduces their ability to respond to unexpected events (which ironically always occur), or to seize opportunities for growth when they present themselves.