Fixed Income for the Retail Investor?

Kristjan Velbri,

Investor Community Manager at Investly

Traditionally, fixed income has been inaccessible to the average investor. However, this time around, with the help of technology, fixed income products have been made accessible to investors of all types and sizes via crowd or peer-to-peer lending.

For some years now, technology and the marketplace model in particular, has been eating away at traditional finance. It is still early days, but the future looks very promising, both for lender and borrowers.

What is Peer-to-peer or Crowdlending?

It is a model whereby loans are financed by the crowd. The crowd is made up of investors large and small, from all walks of life.

Crowdlending platforms are the connection points between investors and borrowers. It allows investors access to assets that were previously the domain of banks and financial institutions. It has attracted more than 200,000 investors in the UK alone.

Peer-to-peer has for the last ten years mostly been associated with consumer lending. However, online business lending is about the same size. It is said that peer-to-peer is still in its early stages and that’s true, yet early platforms launched in a recession and are still growing fast.

Invoice discounting, at least by volume, is at an even earlier stage.

Invoice discounting, or invoice financing, enables a company access to cash against receivable invoices; with a small discount which covers investors’ return and the platform’s fee.

Businesses like it because it offers them access to immediate cash against invoices with lengthy payment terms. Larger businesses get to choose who they do business with and they have no qualms about asking for 60 or even 90 day payment terms.

Banks have become increasingly risk averse, largely due to tougher regulations, and small businesses found it tougher to get vital finance. This has contributed to the growth and successes of P2P
platforms as they have the ability to assist these businesses.

Investors like it because it offers exceptionally high returns compared to anything else available and it allows them access to an asset class that was previously the domain of banks and factoring houses.

When buying the invoice of a small or medium company, the credit risk is actually with the larger company in the transaction. Normally the company buying the goods or services is a larger company with a stronger financial footing. This lowers the risk of payment default considerably and data from platforms confirms it.

‘investors can expect to earn double digit returns’

What’s more, the average duration of an invoice ranges around 40 days. This means investors also benefit from increased liquidity; investors can move their funds very easily.

Other crowdlending platforms don’t come even near that as their average durations range from 2 to 5 years.

All in all, investors can expect to earn double digit returns, at least based on past data. This can make invoice trading more attractive compared to other asset classes.

It is not mentioned often enough, but it is important to consider fees; few platforms charge investors.

Ruth Chamberlain, who heads the Investly in the UK comments ‘Investly has entered the invoice financing market because we believe there is still room for strong growth in the UK. Some of the growth will come from businesses switching from banks and traditional providers but not all of it. The pie itself, as the saying goes, is growing. More and more businesses are using invoices to finance growth. In the last ten years, volumes have almost doubled in the UK. The same applies to many other European countries. ‘

Working capital is the lifeblood of businesses. Invoice financing, factoring and similar forms of commercial finance provide hundreds of companies with cash that they need not just to survive, but grow their business.

At the same time, invoice trading provides investors an opportunity to diversify their portfolio while also improving liquidity. The simplicity, low cost and transparency of using invoice finance virtually guarantees growth which is why Investly is committed to this space.