Yesterday I attended Investly‘s first ever investor event. The goal of the event was to give investors a clue as to what’s happening with Investly and to probably create a bit of hype about factoring being released.
(Before I go further, I’d like to point out that these kinds of events are good marketing and go a long way in terms of creating goodwill towards a business! Even though it was somewhat chaotic, in a world where everything is digital, investors still want to see the people they’re trusting their money with!)
What is factoring?
Essentially factoring is one company selling its invoice to a third party to receive funds early. For example business A does a service for business B and bills them for x amount of euros, with a 3 month deadline to pay. The problem being, business A needs the money quicker than 3 months – therefore they sell the invoice with a slight discount to a third party and get the money instantly and the third party gets paid by business B once the deadline has arrived.
Generally in this scenario business A is a smaller company who needs to manage their cash flow and business B is a bigger company where the wheels turn very slowly. For an investor this means they put up the money to buy out the invoice from business A and get compensated once business B pays off the bill when the actual deadline hits.
Factoring by Investly Q&A
At the event Siim Maivel (CEO of Investly) talked a bit about their plans for factoring and the people got to ask questions about how it’s set to work. Since it’s a completely new product then it’s important to communicate all the potential risks of this type of investment. (This is my personal summary based on the discussion, not a word-for-word transcript, so keep an open mind).
- Multiple businesses were taking out loans from Investly for the purpose of managing their cash flow. They might as well have been doing it with factoring instead of taking out a loan.
- Investly tested factoring as it currently is on the market and concluded that it’s a product that’s too complicated as-is, getting factoring from a bank requires too much legal knowledge to make it viable for most small businesses.
- Factoring will start off in a closed beta – the system is ready and new investors will be let in based on a waiting list to test the scalability of the system.
How will fraud be detected? (the fake invoices problem)
To start, in addition to thorough background checks for both businesses to prevent issues there are minimum requirements to qualify for the service. Initial estimate is that the business will have had to report for at least 1 year of business, and have about 30-40k of cash flow per year.
What are the expected returns? Minimum invoice size?
Returns will be based on the sales discount, which is likely to be 1-2% for 30-day invoices and 2-4% for 60-day invoices. (On a monthly basis). This will include Investly’s fee as well, meaning that less than 1000€ is probably unreasonable to take into work.
What’s the potential market for this?
So far they’ve had a “sign up if interested” mailing list working on their site, and the interest has been ‘big’. Siim claimed that in England, 90% of the businesses who use factoring have not used it before due to difficult access, making the potential market bigger than current factoring market would imply.
How will defaults be avoided?
- If a ‘client’ defaults due to fraud, despite Investly having done due diligence, ordinary debt collection processes will start.
- If the client fails to pay due to a bad financial situation – Siim estimated this to be unlikely due to the company towards whom the invoice is placed is likely to be a bigger company and be less likely to suffer difficulties.
How quickly will the funding process work?
Due to the short term aspect, speed of processing requests is important. Hope is to do it in a day or two, future automatisation is planned, but currently not at the top of the list of developments.
What could be the monthly amount of invoices processed (is a 100K invoice likely to get funding)?
Currently there aren’t enough investors to probably work with such big sums. There are talks with anchor investors to get the initial ball rolling, so hopefully reasonably sized invoices will not be problematic.
What/who is an anchor investor?
Someone who can invest more than 100€. (Meaning, this isn’t an actual ‘status’ that gets perks of some kind at this point.)
Is there a limit for participation per invoice (can one person buy up a 3000€ invoice for example)?
Currently no such limit has been set. If the demand for a specific invoice is big, then the auctioning system will actually end up increasing the purchase price, making it a better deal for the company selling the invoice. (Apparently there’s a lot of complicated math behind it).
Would partial sales of an invoice be possible?
Not at the moment, not enough reason to put in the work for it. Would be easier if someone just split a bigger invoice into multiple smaller ones if a partial sale is important. (For example bill 2x50K instead of 100K if they just want to sell half.)
My personal opinion is that factoring as an idea is a great product. As a small business owner, I am familiar with cash flow issues, especially if you don’t have too many clients. The theoretical market share could be quite big, provided that they get the pipeline going, and manage to get enough investors. Since a lot of the invoices are relatively short term, it’s not as capital intensive in some ways.
I’m interested in how the IT system holds up and how the auctioning system will work, so I hope for more detailed information on that in a bit. Overall, it’s good of them to try to expand, since they’re tapping into a market where they have almost no competition. In some ways that’s good, in some ways problematic since they have to put a lot of effort into making sure everything works as it should.