We recently earned a solid 12% return over 4 months on an invoice discounting deal. Invoice discounting deals are riskier than invoice factoring deals, but the returns are higher. After careful analysis, we decided to invest and emerged richer, both in terms of monetary reward and investment experience. Today, we’ll share our experience here.
Invoice Discounting Deal
In late July, we invested in an invoice discounting deal through Capital Match. Unlike previous invoice factoring deals that we discussed, an invoice discounting deal is riskier because the invoice is not assigned to investors. For this specific invoice deal, we expect to earn 5.6% return over 2 months. Further details below.
- Seller: Marine contractor
- Debtor / Buyer: Established shipyard in Singapore
- Seller-Debtor relationship: more than 12 years
- Invoice Amount: $113,800
- Advance value: $74,000 (or 65% of invoice value)
- Expected payment: historically settled within 60 days
- Interest rate: 3% per month (or 0.75% per week)
- Notification: Non-notified. Assignment prohibited.
- Settlement: To a jointly controlled bank account
- Recourse: Buy-back of invoice, PGs by directors
Payment does not go to Investors directly
In invoice discounting, the invoice is pledged as a loan collateral. Payment from the shipyard (the debtor) first goes to the marine contractor (the seller) before it is transferred to investors. There is a risk that the marine contractor may withhold payment to investors. To mitigate this risk, the payment from shipyard will go to a bank account jointly controlled by the marine contractor and Capital Match.
Invoice quality may be suspect
In invoice discounting, the investors (or the crowdfunding platforms) are usually not allowed to contact the debtor. Hence, it is difficult to verify the quality of the invoice.
Debtor may not pay up
Trade credit insurance is taken against the default risk of the shipyard. However, the shipyard could still delay its payment due to unsatisfactory service.
Overall moderate risk
Overall, we think the deal carries moderate risk, mainly due to the weaker financial profile of the marine contractor. But the risks are mitigated by the long working relationship between both parties, payment to a jointly controlled account and the low advance ratio. The other risk will be failure of the crowdfunding platform.
Having considered the risks, we decided to invest as we find the return attractive.
We invested on 27 July and expected full payment in 60 days. However, we received a small partial repayment on 30 August and the balance on 11 November. This was 2 months longer than what we expected. Total interest payment, including late fee, was $69.90 against a principal of $564.54. Simplistically, this translates into a 12% return over 4 months. Solid returns!
This deal is moderately risky and complicated. Investors can easily dismiss it because it involves SME and shipyard. But for investors willing to delve deeper, they will find that some risks can be mitigated. Payment may be late, but investors continue to earn late fees and are protected by the low advance ratio.
Invoice discounting can earn good returns. But it requires some effort to understand and analyze. There’s no free lunch anywhere.
To learn more about invoice crowdfunding, please refer to our Investor’s Guide to Invoice Crowdfunding.