Invoice Crowdfunding can be confusing to the p2p investors because there is now one more party involved – the Debtor. Also, the terminologies used are different. In this post, we go through the basics and explain the key features of an invoice deal. Also, we’ll teach you how to analyse an invoice by looking at the different risk factors.
Key Information of An Invoice Crowdfunding Deal
- Seller: This is the company that is selling its unpaid invoices for immediate cash.
- Debtor: This is the company that will make payments for the goods or services it received from the Seller at a later date.
- Invoice Value: The amount of payment that is owed by the Debtor to the Seller for past goods and services rendered.
- Payment Date: The date at which the Debtor is expected to make payments.
- Advance: The amount of cash that is released immediately on sale of the invoice.
- Discount: The fee earned on financing the invoice deal, usually expressed at percentage of invoice value per 30 days credit term.
- Disclosure: Whether the Debtor is informed of the factoring transaction.
- Settlement: How the Debtor intends to make payment on the Seller’s invoice.
Risk Assessment of an Invoice Crowdfunding Deal
Beyond reviewing the key terms, investors should consider the following when thinking about the riskiness of each invoice.
In invoice financing, a large part of the risk is on the Debtor failing to pay. Hence, it is important to understand the nature of Seller-Debtor relationship.
For example, if the Debtor is engaging the Seller for the first time, there is a risk that the Debtor may find the goods or service provided to be unsatisfactory and hold back payment.
Debtor Financial Conditions
The financial conditions of the Debtor is also an important consideration. Thankfully, most Debtors are large corporates with credit ratings. Trade insurance is sometimes taken to cover the risk of Debtors going bankrupt.
The advance ratio (advance as a percentage of invoice value) gives a rough indication of the buffer available for Investors in the event that there is dispute on the invoiced amount.
For example, an unpaid invoice may be sold for 80% cash. The remaining 20% of the invoice gives some protection against counter-claims by the Debtor against the Seller.
Disclosed versus Confidential Facility
Disclosed invoice financing deals are often considered less risky. In a disclosed transaction, the online platform can verify with the Debtor on the quality of the goods and services provided and find out whether there are any potential disputes that could lead to delay payments. Such checks can be difficult to do in an undisclosed (or confidential) invoice transaction.
Payment / Settlement
When the Debtor makes payment, will the cash transaction be at risk? The safest option is when payment is made directly into the Online Crowdfunding Platform. But sometimes this is not possible due to a number of reasons. The alternative would be into an account jointly controlled by the Seller and Online Crowdfunding Platform. Finally, the riskiest option will be payment made to the Seller first, before being transferred over to the Online Crowdfunding Platform.
Are you ready for your invoice crowdfunding opportunities?
Other than p2p lending, invoice crowdfunding is also developing rapidly in Singapore. Platforms such as CapitalMatch, New Union, InvoiceInterchange, Capital SpringBoard are offering such opportunities to their investors.
If you want a walkthrough of a previous invoice deal that we’ve participated, do refer to our previous post.