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Success Story – Invoice Crowdfunding for Marine Contractor (21% interest p.a.)

September 23, 2016 by CrowdSmarter 8 Comments

success_invoice

We recently started invoice crowdfunding with Capital Match and are quite happy with the results so far. To-date, we have invested in 35 invoice deals, of which 6 have already fully paid. The remainder will be due over the next few months.

Invoice crowdfunding is slightly different compared to p2p lending. The returns are attractive, although the tenures are much shorter. The risks are slightly complicated because there is now one more party involved – the debtor.

We previously shared our successful p2p loan to a manufacturer. Today, we’ll go through step-by-step a successful invoice crowdfunding deal that we invested in.

Invoice Crowdfunding Success – A real story

In late July, we invested in an invoice crowdfunding deal with Capital Match. We consider the risk to be moderate. Effective interest rate is a 21% per annum. Further details can be found below.

invoice_info_cm

invoice_debtor_cm

Quick Review

The invoice seller is a Marine Contractor that have done work for a Shipyard (the invoice debtor). It is now selling its unpaid invoices (due from the Shipyard) for immediate cash. Crowdfunding investors can purchase the invoice through Capital Match.

invoice_marine_contractor

Terms of the Invoice Deal

  • Invoice Value: $71K. This represents the value of the work it did for the Shipyard.
  • Advance Value: $57k (80% of invoice value). This represents the funding from investors.
  • Expected payment: 30 days (30 August 2016)
  • Interest rate: 2.2% per month (or 0.55% per week).
  • Disclosure to Debtor: Full disclosure with debtor with payment direct to Capital Match’s account.
  • Recourse: Buyback by Marine Contractor.

Risk Analysis

In invoice deals, the invoice debtor plays an important role because it is the party responsible for making payment to investors. The above transaction is also a clean sale – the invoice is sold to investors. (There is another type of invoice deal called invoice discounting, in which the invoice is pledged as a loan collateral. We’ll discuss invoice discounting next time.)

What are the risks involved? Here are our thoughts:

Risk 1: Shipyard defaults on invoice because Shipyard is in financial difficulties.

Unlikely. The Shipyard is a listed company with a very strong balance sheet.

Risk 2: Shipyard withholds payment because of unsatisfactory work by Marine Contractor.

Possible. Given that the Marine Contractor has been providing services to Shipyard since 2009, we think the Marine Contractor should be competent enough. However, there could be some rework required from time to time. This could lead to delayed payments or counter-claims. In these cases, the 80% advance ratio provides some protection to investors.

Risk 3: End customer pays late to Shipyard, resulting in delayed payment to Marine Contractor.

Possible. The Offshore & Marine industry is roiled by lower orders and bankruptcy of Swiber. This may lead to delayed payments throughout the industry as banks reduce lending to the industry.

Risk 4: The invoice is fraudulent.

Unlikely. Because the invoice is verified against the Shipyard.

Risk 5: The crowdfunding platform may fail.

As with all crowdfunding, there is always platform risk.

Risk 6: The Marine Contractor may not be able to buy back the invoice

The buyback clause is a back-up option triggered only when Shipyard fails to pay on the invoice. The director of the Marine Contractor also gave a personal guarantee to support the buyback.

Overall Assessment: moderate risk

Overall, we think that the risk comes mainly from the Shipyard paying late or not making full payment due to unsatisfactory work. The offshore and marine related industries are in a tough situation now and payment delays would not be surprising. The mitigating factor will be the Shipyard’s strong balance sheet and the 80% buffer (advance ratio) on the invoice value.

Decision Time

Having considered the risks, we thought that the 21% per annum interest rate is attractive. We decided to invest.

Repayment

We invested on 26-July and received repayment on 13-Sep. The duration was 49 days, longer than our initial expectation of 30 days. Nonetheless, the 80% advance ratio gave us protection and our investment continued to earn returns throughout the delays.

invoice162

Investment Principal = $338.16

Interest = $338.16 x 0.55% per week x 7 weeks = $13.01 (rounded)

Commission = 20% x $13.01 = $2.59 (rounded)

Net interest = $13.01 – $2.59 = $10.42

ROI = $10.42 / $338.16 = 3.0% for 7 weeks

ROI, annualized = 3.0% x 52 weeks / 7 weeks = 22% (or 21% using monthly calculations)

Portfolio Approach

Why go through all the trouble to invest $300 and earn interest of $10? Well, the above example just shows the return for one invoice.

invoices

We’re actually building up a portfolio of invoices. This allows us to diversify our risk so a single default won’t damage our portfolio too heavily. Our returns are also reinvested continually to maximize our overall investment returns. These are more advanced topics – investment strategy and portfolio management – which we’ll elaborate next time. Stay tuned.


For more information on invoice crowdfunding, please refer to our previous posts – “What is invoice crowdfunding?“, “My first invoice financing trade” and “How to Analyse An Invoice Crowdfunding Deal“.

 

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Filed Under: Invoice Financing, News

Comments

  1. Jn says

    October 10, 2016 at 5:17 pm

    Hi. I thought the minimum for Capital Match is $1000. Does it mean invoice financing is less?

    Reply
  2. CrowdSmarter says

    October 10, 2016 at 9:13 pm

    Yes, you are right.

    But I’m using the automated investing function. The default option is still $1,000 but in the case of over-subscription, it will automatically pro-rate everybody’s allocation. Because the demand is quite large relative to the invoice opportunities, pro-rate allocation is quite common. Hope this clarifies.

    Reply
    • Jn says

      October 11, 2016 at 10:03 am

      Thanks. The guys at Capital Match also replied to me. They said that you need to pledge 1k but depending on demand they might allocate less.

      Reply
  3. JN says

    October 11, 2016 at 9:09 pm

    Hi.

    First time doing invoice financing at CM tonight. It’s a weird experience as the facilities are easily filled. There are just too many people doing Auto Funding. Don’t these investors think about where to put their money? This forces me to do Auto Funding too despite not intending to. So in order to get in the facilities that I want, I need to activate it just before my preferred facilities open. Then I turn off Auto Funding when I don’t want to lend to the next customer. Quite a strange method if you ask me.

    Also the quality of the financial statements is not great. Some are outdated. Formats are different. And they don’t show the whole balance sheet. Non-current liabilities are missing, making it hard to work out the leverage ratios. Also there’s not enough time to ask and clarify about the statements since the activity happens at the end of the day or at night. Will the people at CM actually answer your questions?

    Reply
  4. CrowdSmarter says

    October 11, 2016 at 9:47 pm

    Hi JN,

    Agree with you it may seem confusing for first time investor. And demand is very high. There are investors (like us at Let’s Crowd Smarter) that started investing in invoices earlier on, so we’re fairly comfortable with the whole process. When we increase our investments, it will crowd out other investors, like yourself.

    If you are not comfortable, I would suggest you download a few invoice sheets whenever they are available and study them carefully. Then monitor them for a few months before making your first investment. Always good to be careful.

    As for the disclosure of the statements, CM has to strike a balance between showing enough info to investors and not revealing too much to their competitors. This was a big problem earlier in the year.

    I used to do my own analysis for every invoice and loan, but now I trust their underwriting process. I may be wrong – only time will tell.

    If you have doubts, you can always email them or visit their offices during their information session. I personally went down to their offices several times and find the team quite approachable.

    Cheers, CrowdSmarter

    Reply
  5. JN says

    October 12, 2016 at 1:31 pm

    Hi.

    Just an update. I am now getting Funding Societies’ Invoice Financing opportunites in my mail and it seems that the seller’s profile and the borrower / buyer profile are presented better and more informative compared to CM (at least in the Invoice Financing space). They include DP ratings and default probability if available along with their own internal rating. Downside is that FS is more stict with keeping to regulation so they have to limit the number of investors. So for large invoices, they are asking for larger minimum balance.

    Thanks for organizing this blog. It has been very informative.

    regards

    Reply
  6. Capital Match says

    October 13, 2016 at 2:08 am

    Hi JN,

    Thank you for you interest in our invoice financing facilities.

    We are always happy to help investors with any questions.

    To address some of your concerns:

    1. Auto Funding will be soon improved so you will have much more flexibility. Please give us another few days, we will inform all investors

    2. What matters most in invoice financing is the quality of debtors and notified payment from debtors (directly to our bank account). If you observe the facilities on our platform, 80%+ facilities are on notified basis and a typical debtor would be Keppel, Starhub, government agencies etc. – top quality organizations. As a result, the risk is low and mainly limited to the payment risk of a large debtor (which is very low for these types of debtors).

    If you talk to sophisticated investors investing across the platforms in Singapore, on invoice financing we not only offer the highest rates to investors in the market but also the best protection / quality of facilities. On a risk adjusted basis, we believe our facilities offer by far the best value to investors.

    Across S$12m invoice financing facilities to ca. 30 sellers in the last 6 months, we only experienced one at risk situation with a seller attempting not to pay us on time. Currently there is a restructuring plan in place with 3 payments over the next 2 months (we just received first payment this week). This facility was non-notified (so higher risk but also much higher potential return). We do not see any other facility or seller at risk at the moment.

    3. Financial statements and bank statements are obviously important and we review them thoroughly for each seller. We no longer use DP data (rating and default probability) since we have seen very random default / performance of companies across DP ratings. We have a very experienced team in invoice financing for SMEs and follow the best practices in credit assessment, facility structuring and debt collection.

    4. Invoice financing is not currently regulated by MAS. Thus, there is no investors limit / cap requirement. We are in regular communication with MAS, have applied for a CMS license and comply with all the regulations.

    Feel free to e-mail us at support@capital-match.com if you have any more questions.

    Kind regards,
    Pawel

    Capital Match

    Reply
  7. JN says

    October 13, 2016 at 6:20 am

    “If you observe the facilities on our platform, 80%+ facilities are on notified basis and a typical debtor would be Keppel, Starhub, government agencies etc. – top quality organizations.”

    Thanks for your reply Pawel. That’s true. I have ignored the FS offers so far because of the invoice payer. It so easier for me to pull the trigger on CM offers. I continue to use both platforms as I see there is merit to both and increase my reach. Hope for more improvement in the whole crowdfunding space future.

    Reply

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