Fintech: P2P invoice financing a short-term investment tool

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 26, 2018 - April 01, 2018.
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Local investors looking for short-term investment options can now consider invoice financing notes on peer-to-peer (P2P)

lending platforms.  Compared with fixed deposits, these notes offer higher returns over shorter tenures — but at higher risk.

“Let’s say an investor wants to buy a property in six months and has this amount of cash sitting idly. Instead of putting it in a fixed deposit account, he can invest in invoice financing notes to earn a higher return. After that, he can withdraw his money to pay for the property,” says Chua Chin Hang, chief technology officer at B2B Finpal Sdn Bhd.

Invoice financing is a way for businesses to borrow money based on the amount owed them by their debtors. It is now a common way to raise funds in markets with a thriving P2P industry.

Before the emergence of such platforms, invoice financing was mainly offered by banks and large financial institutions to businesses. However, stringent requirements are often imposed on borrowers.

Today, more small and medium enterprises (SMEs) can access this service on P2P platforms, although at a higher interest rate. Meanwhile, individuals can participate in this investment product to generate returns.

B2B Finpal is one of six P2P financing platform operators licensed by the Securities Commission Malaysia (SC). The company launched its platform in July last year, aiming to carve a niche in the industry by offering investors short-term financing products that provide higher liquidity and greater flexibility such as invoice financing notes. It is currently one of two platforms in the country offering this investment product (see box).

“We are catering for such demand and have been successful so far. Our investors appreciate the flexibility we offer them. The result is seen in the amount of funds raised since last year,” says Chua.  

As at March, the platform had raised about RM15 million by issuing 626 invoice financing notes. It had also garnered about 500 registered investors, according to Chua. B2B Finpal currently offers the largest number of invoice financing notes on its platform.

 

Reap returns within four months

The invoice financing notes offered by B2B Finpal have a minimum investment amount of RM1,000. The tenure of these notes ranges from one to four months, with simple interest rates of 11.5% to 17% per annum. The net return to investors after deducting fees ranges from 8.05% to 11.9% per annum.

Chua says the platform has adopted an interest-sharing model, instead of charging an upfront fee like some platforms. When interest payments are received from the issuers, 70% goes to the investors while 30% goes to the platform.

Chua says this model is aimed at encouraging more people to invest with the platform. “Investors would be reluctant to put their money with us if we charged them an upfront fee. They would be uncertain about investing with us. After all, the P2P industry is fairly new here and there is no historical data on default rates to give investors an idea about the risk and returns they could expect.”   

Invoice financing notes are not commonly seen on other P2P platforms. The main reason is that it requires the operators to validate that the invoices, pledged by the issuers to raise funds from investors, are genuine. Chua says there have been cases of companies providing fake invoices to platform operators.

On top of that, the operators have to assess the issuers’ business and financials to ensure that the suppliers can provide their goods and the buyers can make prompt payments. “There is a lot of work involved when it comes to validation and assessment,” says Chua.

However, B2B Finpal is able to do so because it leverages the business of its parent B2B Commerce Sdn Bhd, which facilitates the buying and selling of goods between retailers and suppliers using an online platform. The retailers are mainly the bigger players in the industry such as Parkson, Tesco, 7-Eleven and Watsons while the suppliers are SMEs that provide fast moving consumer goods, according to its website.

B2B Commerce facilitates trade by handling electronic documents such as purchase orders, invoices and payment advice notes. The platform also helps the suppliers ensure that the documents they submit adhere to the standards and requirements set out by the buyers.

Some of the suppliers are also the SMEs issuing invoice financing notes on B2B Finpal’s platform. “The invoices that the suppliers pledge to us for funding are already validated via the B2B Commerce platform. So, we know that the invoices are genuine and there has been no hanky-panky. We also have other documents, including purchase orders and payment advice notes, to assess the credibility and growth of the SMEs,” says Chua.  

 

Lower default rates in the long run

Chua expects the long-term default rate of B2B Finpal’s investment notes to be lower than the industry standard of 3% to 5%. That is because, like other P2P platforms, the operator attaches a credit score to each issuer by assessing the data sourced from Bank Negara Malaysia’s Central Credit Reference Information System (CCRIS), Credit Bureau Malaysia Sdn Bhd and CTOS Data Systems Sdn Bhd. The data allows the platform to form a “base score” of the SME’s credibility.

B2B Finpal also incorporates its parent’s internal data into its credit scoring system to gain more insights into the credibility of the companies. “We have another set of numbers that shows how many years they have been trading and at what rate their businesses are growing. Or whether there is a huge number of rejected goods by the retailers. We can also use the information to compare with their [publicly available] financial reports to see if there are any discrepancies or red flags,” says Chua.

By combining the information from various sources, the platform then comes up with a final score for each issuer. “That is why we expect our default rate to be lower over the long term,” he says.

B2B Finpal also relies on the retailers’ vetting process to ensure that the suppliers are reliable. “The retailers are big players and they vet all their suppliers. That is because if anything goes wrong with the products, the retailers are the first to get into trouble, not their suppliers,” says Chua.

 

Defaults and risk

There have not been any default cases since B2B Finpal was launched in July last year. Chua says the platform defines defaults as late payments of more than 90 days by the issuers.

“We give them credit terms of 90 days. If they do not meet the terms, we will send them a reminder. We will also impose a charge of 8% per annum. But the grace period is seven days,” he adds.

“If they still do not make payment within 30 days, we will report the case to the credit rating agencies such as CTOS. And if they do not make payment after another 60 days, we will consider it a default and take the necessary legal action to recover the investors’ money.”

However, the platform will first try to arrange some solutions such as allowing the late payment or restructuring the terms. “We will do our best to avoid taking legal action as it is a lose-lose situation for the investors and SMEs,” says Chua.

Despite projecting a lower long-term default rate, he cautions investors to be aware of the risks they are taking. He says it is important for investors to know that they are taking a higher risk in exchange for a higher return. They are investing in SMEs, which are not as established as public-listed companies.

Investors are also expected to take a hit if the retail sector does not do well. “Yes, it is true that the retailers are established companies and financially stronger. But when the industry performs badly and the retailers have to close some of their outlets, investors will have to be prepared to take losses.”

Also, there may be unforeseen circumstances that could affect the SMEs’ ability to make payments, says Chua. For instance, local brand Coffee Tree’s MyCafe 4-in-1 Penang Durian White Coffee made the news last month when several people who drank it were hospitalised. In response, the Agri-Food and Veterinary Authority of Singapore (AVA) recalled the product.

The manufacturer of the product later announced that the packaging had been tampered with. The AVA retracted the recall, but the company’s sales had already been adversely affected.

“If something like this happens to our issuers, their sales will be affected and they may default on their payments. This is something beyond our control,” says Chua.

He adds that the P2P industry as a whole also faces the challenge of issuers taking on multiple loans without informing the operators. “This is something hard to prevent. An issuer could take a loan from a P2P platform and then take a second loan from another platform. We may need a third party to come up with a system that solves this problem. However, if an issuer takes a loan from an illegal money lender, we will not be able to find out.”