In early March 2016, I participated in my first invoice financing trade with InvoiceInterchange. I was actually testing out their system and put in $500 for a catering invoice issued to a major bank in Singapore. It will come due next month and should generate about 1.5% return in 57 days (annualized return of 9.6%). For an introduction to p2p invoice financing, please refer to our previous post.
What’s the invoice about?
The invoice is issued by a Food Catering Company to a major Bank in Singapore. The Food Catering is a young SME that started in 2014. It has a one year contract to provide food catering services to the Bank. The recent invoice is acknowledged by the Bank’s staff and sent for processing. Expected payment date is 57 days.
What’s my risk?
My risk lies primarily with the Bank. As I have already bought the invoice from the Food Catering Company, I have the legal right to collect the payment from the Bank by the due date as stated on the invoice. The Bank has acknowledged the invoice and sent it for processing. As the Bank is reputable and have a good credit rating, I think the chances of default is very low.
There is a possibility that the bank may not pay the full amount (maybe because of unsatisfactory catering service) – but this risk is mitigated by the 90% advance ratio. In other words, the invoice is purchased for only 90% of its value, giving me a protection of 10%.
If the Bank refuse or is unable to pay (for whatever reasons), the Food Catering Company is required to repurchase the invoice. A director’s guarantee is also issued. In such a scenario, my risk will lies with the Food Catering Company or its director. The credit risk of the Food Catering Company, being a young company, may quite high. But the likelihood of this situation happening is usually quite low.
Lastly, the payment from the Bank is always made directly to InvoiceInterchange’s account, so there should be no leakage of funds.
How would the cashflow look like?
Purchase Invoice = 90% (advance ratio) x $69,892 (invoice value) = $62,903
Investor Gross Return = 0.90% x $69,892 (invoice value) x 57 days / 30 days = $1,195
Platform Fees (20% of profit) = 20% x $1,195 = $239
Investor Net Return = $1,195 – $239 = $956
Amount returned to Seller = $69,892 – $62,903 – $239 – $956 = $5,794
What’s my ROI?
ROI (over 57 days) = $956 / $62,903 = 1.5%
ROI, per month basis = 1.5% x 30 days / 57 days = 0.8% per month
ROI, annualized = 0.8% x 12 mths = 9.6% per year
Note: InvoiceInterchange uses IRR – which is actually mathematically more correct, while I prefer to use annualized net return to simply my calculations.
How does p2p invoice financing compare to p2p unsecured lending?
- Invoice financing trades, if properly managed, are usually less risky than unsecured lending. This is because the risk is primarily with the larger institutions, rather than SMEs. However, the return is also considerably lower. Low risk, low return.
- The duration of invoice financing trades is typically just a few months, rather than one entire year. It is difficult to keep rolling over the invoice financing trades, hence there will be periods when cash is undeployed. This will result is lower portfolio performance.
For my first invoice financing trade, I invested about $500. This will generate about 1.5% net return ($500 x 1.5% = $7.5), due in early May 2016. This is a small amount, but I’m still testing out InvoiceInterchange’s platform and trying to understand the intricacies of p2p invoice financing. So far, I quite like their system, although there is definitely some room for improvement. I will invest more in the future and probably test out the riskier-but-higher-return types of invoice financing. So stay tuned.