Invoices as an investment have only been available to investors for a short period of time. It used to be the playing ground of banks and other financial institutions. Thanks to technology, all of this is changing. To educate investors so that they can make educated investment decisions, I've put together a list of things you should know about investing in invoices via Investly.
Who are Investly's customers? What is invoice discounting?
Our target customer is a small to medium business (SMB) in the United Kingdom or Estonia whose customers are larger companies that demand long payment terms. We offer SMBs invoice discounting, which means that investors purchase the invoice for a small discount. The SMB can then put the cash back to work servicing new customers. On the due date, the company that purchased the goods or services, makes a payment to Investly's bank account in the full amount of the invoice. The discount covers investors' return and our fee. Without invoice discounting SMB would have to wait 30 to 60 days for payment and would have to turn down new customers while waiting for payment.
What goes into making a credit decision?
Investly only accepts invoices that have been issued to businesses that have a history of trading for at least five years, annual turnover of at least £1 million and a good credit standing (at least three years, annual turnover of €500,000 and a good credit standing in Estonia). We run background checks for the seller company's directors and stakeholders, we also make sure the seller company has a good credit standing.To get a better grip on the company's health, we ask for the bank statements of all of their account for the previous 6 months. Bank statements offer a very intimate look into company’s financials and they are more up to date than annual statements. Bank statements and other sensitive information is not shared with third parties.
We use Estonia's largest and most trusted credit scoring agency, Krediidiinfo AS (subsidiary of Creditinfo Group), for the credit rating and likelihood of default score. In the UK, we use Experian and DueDil. The rating is expressed in letter combinations:
We use Estonia's largest and most trusted credit scoring agency, Krediidiinfo AS (subsidiary of Creditinfo Group), for the credit rating and likelihood of default score. In the UK, we use Experian and DueDil. The rating is expressed in letter combinations:
- AAA stands for excellent
- AA for very good
- A for good
- BBB for satisfactory
- BB for passable
- B for weak
- C for unsatisfactory (Investly does not accept C rated companies)
Insolvency probability (shown as probability of default or PD) shows the likelihood of the company falling into arrears within the following 12 months.
- At less than 5% the risk is low
- between 5 and 12% the risk is considered moderate
- at 12% or more it is considered high risk.
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Invoice confirmation
We only accept invoices for goods and services that have already been delivered. We do not finance invoices for goods/services to be provided in the future. We ask the company paying for the goods/services to confirm that:
- they've received them
- they are happy with the quality
- and they agree to pay directly to Investly's bank account (as stated on the updated invoice)
Fees
Investly does not charge investors. We charge invoice sellers, but we do not take fees upfront. We get paid when the invoice is repaid. This aligns our interests with those of investors.
Interest rates
To investors, interest rates are displayed on an annual basis regardless of the duration of the invoices (APR - annual percentage rate). A 30 day invoice with an APR of 15% pays out 30/365*12 = 1.23% per 30 days. The 30 day rate is also known as the discount rate. If you keep your money invested for the whole year, investing in 30 day invoices at 15%, your annual return will be 15%. So why display the annual rate? Because it makes it easier to compare invoices with alternative assets (stocks, consumer P2P loans, bonds etc.). It is something investors are already used to, so why fight the tide?
What does the data say?
In the UK investors have advanced £83,000 to businesses (19 invoices). The weighted average net return has been 16.35%, the average duration has been 30 days. The default rate is 0%.
In Estonia investors have advanced €1,180,000 to businesses (75 invoices). The weighted average return has been 14.8%, the average duration has been 31 days. A few invoices are late, we have a repayment schedule with the company in question. Our default rate is 0%.
How is Investly different from other marketplace lenders?
First, we don't charge investors. Second, we're the most liquid marketplace lender in Estonia. Liquidity denotes the speed at which you can turn your investment into cash. The average invoice duration is just 31 days. With most other platforms, the investment duration is measured in years (even with the existence of a secondary market it takes time and effort to sell every loan). This means Investly is the best solution to increase the liquidity of your crowdlending portfolio.
How are invoices different from business loans?
When you invest in a business loan, your credit risk is with the small business that borrowed the funds. When you invest in an invoice, your credit risk is with the larger company that purchased goods or services from the smaller company. Small companies are much more affected by changes in business climate, a loss of customers, regulatory changes etc. All else being equal, larger companies have less issues with making a payment on time compared to smaller ones.
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