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