This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 2, 2019 - September 8, 2019

A growing number of peer-to-peer (P2P) financing platforms are offering invoice financing notes to meet the demand from local investors.

Two of the six P2P platform operators that were licensed in 2016 already offer these notes. They are B2B Finpal Sdn Bhd and Modalku Ventures Sdn Bhd, which operates Funding Societies Malaysia.

Two operators that were licensed this year — CapitalBay and Money Save Capital — told Personal Wealth in a previous interview that they intended to focus on similar products as well.

Invoice financing is a way for companies to borrow funds against the debt owed to them by their clients while awaiting full payment.

One reason P2P platform operators are offering this product is that these notes generally have shorter tenures. Also, the investors are financing a deal that has already been concluded as the invoice has been issued. If the client of the supplier is a reputable company and a good paymaster, the risk of default could be lower.

“We have invoice and working capital financing. But if you look at the take-up trends, the fastest to be taken up is invoice financing. People love it because it is for a short period of one to four months. It is something solid that they can rely on,” says Chua Chin Hang, chief technology officer at B2B Finpal, the only P2P platform operator whose core product is invoice financing.

“If you are talking about working capital financing, it is always about the company having an expansion plan or a new customer and needs more capital. That is financing for the future. But for invoice financing, the deal is already done. In our case, all the invoices are 100% validated [by the invoice debtor] so the issuer cannot run away from [paying back the money].”

Invoice financing notes could be deemed less risky than other types of notes because more supporting information is provided, according to Funding Societies Malaysia CEO Wong Kah Meng. “For example, when you want to do an invoice financing note with a notified structure, the invoice is verified by the invoice debtor [the customer], who pays the money to us [thus bypassing the issuer],” he says.

Funding Societies’ core product is working capital financing, but it also offers invoice financing and other types of notes.

Another factor driving the popularity of invoice financing is that it is a relatively untapped market in Malaysia. Traditionally, larger suppliers to the government and multinational corporations (MNCs) can obtain this type of financing from factoring companies and banks, which may buy a reputable supplier’s entire accounts receivable. Small and medium enterprise (SME) suppliers can rely on credit from invoice debtors to help improve their cash flow. When doing so, the customer (invoice debtor) would structure a credit term for the SME.

But not every invoice debtor is willing to provide such credit to its suppliers. This means there is a gap in invoice financing for SMEs. “Naturally, we do look for suppliers to MNCs, but it is not a huge underserved segment. Those suppliers are fairly large already. We see opportunity in serving smaller suppliers,” says Wong.

“The total financing gap in Malaysia is estimated to be about RM80 billion [according to estimates by the Securities Commission Malaysia]. We have almost one million SMEs and a lot of them are business-to-business companies in the manufacturing, construction or wholesale trading sectors. That means there is a huge opportunity.”

Digitisation supports growth

Meanwhile, the digitisation of transactions means that invoice financing can be done more efficiently. B2B Finpal’s parent company, B2B Commerce (M) Sdn Bhd, digitises trade documents, including invoices, for big retailers and SMEs that provide fast-moving consumer goods (FMCGs). It is present in countries such as Malaysia, Thailand and Indonesia and handles about one million invoices every month.

Chua observes that many companies are opting for digitisation because it simplifies processes. “With the conventional method, the supplier delivers the goods and creates the invoice on paper. The supplier then has to wait for the buyer’s clerk to key the information into the system and verify it. You could be looking at payment terms that go beyond 60 days. I have even seen a case where it took half a year for the supplier to get payment from the buyer. Our parent company has digitised the whole system, so there is no dispute [as to how many goods were ordered and received],” he says.

This solves a problem often faced by operators that offer invoice financing notes — the validation of invoices. By doing so, the third party knows that the invoice provided by the supplier is real and billed correctly because with a digital process, every order and delivery is recorded. The buyer is also able to confirm this from its end. This process makes it easier for operators to issue invoice financing notes.

Chua says invoice financing has a huge growth potential in Indonesia and Vietnam, where their value-added tax and goods and services tax respectively are digitised. “Every single tax invoice issued is actually a digital invoice. That is where the P2P invoice financing opportunity is because you have a verified digital copy of every transaction. China implemented this 10 years ago.”

Despite the potential of invoice financing notes, Chua observes that many investors do not understand how the product works and why businesses need it. This is where the P2P platforms should do more investor education, he says.

“In business, you need cash flow. The reason the buyer needs 90-day terms [for example] to pay the invoice is that the buyer wants cash flow. The same goes for the supplier, which needs cash flow to buy more goods and increase its services [before receiving payment from the buyer]. They need cash to turn around the business and gain more liquidity.”

Risks of invoice financing

An obvious risk of invoice financing is if the issuer (supplier) does not pay the P2P platform operator after it receives the amount owed by the invoice debtor (buyer). One way that operators can circumvent this is by collecting the amount directly from the invoice debtor.  

But doing so would make the process more complicated because the invoice debtor would need to assign the payment to the third-party P2P platform operator instead of the supplier. Some contracts may have to be struck between the three parties — the operator, issuer and invoice debtor. Funding Societies offers this solution through its notified invoice financing notes.

“You have to work with the invoice debtor party, which adds another party to the relationship. So, the structuring of the financing and arrangements to handle the money are very different. This is in contrast to a non-notified note, where I only work with the SME. When you have this additional requirement, you need experience to manage it as well,” says Wong.

The additional step means that notified notes may carry a lower return than non-notified notes, given their lower risk.

For non-notified notes, Funding Societies does a thorough check on the SME’s financial statements and credit reports. It also performs due diligence on the invoice debtor to the extent that it can.

“We look at the transaction track record between the two companies. For example, how long they have been dealing with each other, what the payment track record is and whether they have been paying on time,” says Wong.

Meanwhile, B2B Finpal collects the amount owed directly from the issuer because all the issuers are part of its parent company’s ecosystem when it comes to invoice financing. This means its parent company has the end-to-end documentation on the issuer’s purchases and payments on its digital platform. The P2P platform operator has consent from the issuers to verify the authenticated invoice on its parent company’s platform.

“We have the full digital trail. We know the moment you are paid. That is when we start sending you reminders to pay off the financing received. We can also monitor their business performance. Our system receives the data because the issuer shares the data with us for financing purposes. We set up monitoring with credit bureaus to check if there are lawsuits and other things, but we also monitor data from the business point of view,” says Chua.

B2B Finpal does have issuers that are outside its ecosystem, but only for working capital financing. The platform needs to monitor the issuer’s business before allowing it to issue invoice financing notes.

In Chua’s view, invoice financing is not viewed as less risky than other types of notes. However, investors need to do their own research on the notes and companies.

“There are always trends in the industry to observe. For example, after the general election in 2018, people were spending less. So, the growth of FMCGs slowed down. If you invested in FMCG companies that sell things like luxury clothes, sales may [be affected]. But companies that sell necessities may not be affected as much,” he says.

To reduce the impact of defaults, Chua and Wong advise investors to diversify their investments across various notes. This can be done using the platforms’ auto-invest tools, which help to spread out investors’ capital across multiple notes according to their preference.

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