Factoring / invoice financing as an investment opportunity

Most P2P investors start by investing into loans – either loans to people or to small businesses. However, as time goes on, the opportunities offered by P2P portals expand, and one of the newest, which is quickly expanding, is factoring (also known as invoice financing).

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What is factoring / invoice financing?

The core idea of invoice financing is to help businesses manage their cash flow. If company A is a small business that bills a big business, company B, then factoring allows company A to sell the bill instantly with a small discount to investors instead of having to wait the full period for company B to pay the bill.

For an investor the chance here is to invest into short term claims, mostly in the ranges of 1 month – 2 months, allowing for reasonably quick turnover with similar returns to other P2P investments. Theoretically, since in this equation company B is generally a reasonably big company, with a good payment history, then risk should also be reasonably low.

Who offers invoice financing?

Currently there are two P2P portals that can be easily accessed by Estonians that allow you to invest into invoice financing. The Estonian Investly, which offers factoring in addition to SME loans. The second option is the Latvian marketplace Mintos that lists investments from different originators. (Currently Debifo, hopefully more soon.)

The process of invoice financing is essentially identical to investing into other P2P investments. You can set up automatic investment settings to make bids, but you can also spend time to manually look into the information provided about the business to assess its reliability.

Recovery process

One of the key issues with P2P investing however is assessing likelihood of defaults happening and how the recovery process works from there on. I asked both Investly and Mintos for a short comment about recovery.

Mintos: Loan Originator monitors all incoming payments and the system tracks late payments. In a case of unexpected payment delay, Loan Originator contacts the Borrower to discuss the situation and to decide on the next necessary steps to receive the full payment. In most cases, the discussion acts as a reminder to the Borrower to contact the Purchaser regarding the payment. If the payment is late and the Borrower does not cooperate, Loan Originator contacts the Purchaser directly to resolve the issue.

Investly: Investly actually enforces a repurchase obligation. There is in depth info about this in their user’s agreement6.12.2. If the repurchase term has passed since the due date of the Invoice (Repurchase Term) and the Client has not fully paid the Invoice underlying the Claims assigned to the Investor, the Invoice Seller shall be immediately obligated to repurchase the Claims from the Investor and the Investor shall be obligated to re-assign the Claims to the Invoice Seller for a fee (the Automatic Repurchase Obligation).

How does invoice financing help diversify your portfolio?

One of the key elements of investing is diversification, especially when it comes to P2P investments. However, diversification is more than just having multiple loan/investment pieces, it’s also diversifying across different areas that’s important.

Currently the three key points that factoring offers you are:

  • Chance to invest into the success of SME businesses
  • Generally short term investments
  • Likelihood of acting differently from P2P loans in different economic cycles

However, there are also some potential issues:

  • Difficult to assess risk (rather new area even for P2P)
  • Recovery process doesn’t have tested history (yet)

I am personally currently investing into a few Debifo invoices to see how the system works. Since I’m more interested at the moment in adding in short term investments, so factoring could be a potential option here to balance out all the long term 5-year P2P loans that I have in my portfolio at the moment.


If you happen to want to start investing into Mintos, then they have an affiliate program if you wish to support my investments there. Click here.

10 thoughts on “Factoring / invoice financing as an investment opportunity

  1. Hi, Kristi!

    I would like to offer a short comment on this:

    “Difficult to assess risk (rather new area even for P2P)”

    Invoice discounting via P2P platforms is relatively new in Estonia, but in the P2P universe it’s very big. The largest UK platforms have been in operation for more than four years and have a total volume of almost £750 million (£20 million this year alone). You can check the volume data on altfi.com

    Regarding risks: Investly performs credit and background checks on the seller of the invoice and the debtor as well. They are both given credit raitings and default likelihoods (just as we do with business loans). Investors can see the invoice (you are prohibited from sharing it, keep that in mind when blogging). Based on that information, investors can make an informed decision. All in all, assessing risks should be relatively simple. We are working hard to bring you new invoice auctions. Then you’ll be able to check it out yourself.

    Kristjan Velbri

    Investly Investor Community Manager

    1. Hi, Kristjan,

      Thanks for being here. Could you please comment on the “repurchase obligation” and how likely it is to recover the investment after repurchase obligation? Factoring is essentially a “fast-forward” to the payment date and usually used by SMEs that lack financing. It would be hard for SME to find enough cash to cover the unpaid invoice and continue the business operations.

      I have the other question regarding Investly’s focus. Which market (UK or Estonia) is going to be the main market? Will investors be able to invest in both?

  2. Hi, James!

    In the event of a delay out team will treat each and every case separately and be in contact with seller to find out the reason for the delay and the likely date of payment. Offering an extension is one of the options available to ensure payment. In the unlikely case of failure to repay, we can do a recourse to ensure the return of investors’ capital, thus making the invoice seller return the funds. Unpaid invoices usually mean the debtor company has either defaulted or is facing solvency issues.

    Investly does a full background and credit check on both parties – the invoice seller and the debtor – to ensure the return of investors’ capital. The credit rating and the likelihood of default are both visible to investors before making bids. You can read more about our risk management and credit scoring processes if you follow these two links:
    https://investly.wordpress.com/2014/11/13/how-does-investly-manage-the-risks/
    https://investly.co/contracts/creditrisk

    We are open to all investors from the European Economic Area on both the Estonian and the UK side of the platform. However, to make bids on UK invoices, you will have to sign up on the UK page. The same goes for the Estonian page.

    The focus is on developing the invoice discounting service in both countries. We welcome Estonian businesses to enlist loans on our platform, but the focus is definitely on invoice financing, in both countries. Business loans will not be available to UK businesses.

  3. Hi Kristi,

    Thank you for this interesting posts.

    Is there any information available on the expected annual return specifically for investing in factoring?

    Thanks,

    James

    1. Looking at Mintos, then the DEBIFO invoices are 11-13%. How that translates into final returns is questionable (out of the 4 invoices I’ve picked up, 2 are late and 2 haven’t reached payment dates yet, so difficult to tell how much of a loss there is from delays at this point).

    2. Hi, James!

      The gross return on invoices is expected to range between 8% and 15% in the UK and 12-20% in Estonia. The founders are taking part in every business loan and invoice auction with their own capital (as opposed to the company’s capital, as many others are doing). In addition, some employees (like me, for instance), are taking part is as well. This means we have an incentive to be careful when choosing invoice suppliers (see my previous comment for more details on how we manage risks). We try to minimize risks but you should remember that investing always carries risk.

      Regards,

      Kristjan

  4. In factoring one has to keep in mind, if the invoice will be paid by the original owner of the invoice if the debtor does not pay. This acts as a guarantee and double when you consider buyback guarantee. Not all invoices have this option on Mintos. So choose your invoices with care!

  5. In factoring one has to keep in mind, if the invoice will be paid by the original owner of the invoice if the debtor does not pay. This acts as a guarantee and double when you consider buyback guarantee. Not all invoices have this option on Mintos. So choose your invoices with care !

      1. There is field “Invoice Recourse ” in every Debifo loan. If the invoice transaction has recourse and the Purchaser does not pay the invoice, the Borrower is responsible for the repayment of the full invoice amount plus interest.

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