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).


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.

Factoring Q&A from Investly’s investor event

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).

Why factoring?

  1. 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.
  2. 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.
  3. 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?

  1. If a ‘client’ defaults due to fraud, despite Investly having done due diligence, ordinary debt collection processes will start.
  2. 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.