(Sept 4): For small and medium-sized enterprises, a single delayed payment from a customer can mean a major dent in cash flows. Invoice crowdfunding start-up Validus Capital thinks it has a good solution to this problem.

Two-year-old Validus has partnered Visa to launch a “virtual card solution” that gives SMEs credit in exchange for their invoices. Each SME is given a monthly credit limit and can draw on this credit by putting an invoice up for funding on the Validus platform. Validus says it has about 50 accredited investors on its platform, which consistently fund these invoices within an hour.

“We do not cherry-pick which invoices to finance, which makes us quite different from the banks [and other invoice crowdfunding platforms],” says Vikas Nahata, co-founder of Validus. “We can approve SMEs within 48 business hours on average. Then, we offer to finance all their receivables at a rate that is more expensive than the banks but cheaper than their alternative options such as money lenders.” The start-up charges SMEs an interest rate of 10% to 18% a year, depending on how risky the business is.

Validus was born from a programme to help online grocery company GroXers, which had been unable to get financing for its invoices from the bank. Nahata explains that he and co-founder Ajit Raikar were approached by Visa and a global bank to come up with a way to help GroXers. That led to the development of the virtual card.

“Visa is the technology that provides the payment gateway [for our programme],” says Raikar, a veteran banker who left his role as SME head at DBS Bank to start Validus. Raikar was also a vice-president at Bank Danamon Indonesia and a regional head at Citi. Together with Visa, Validus built a software system that automates the payment process for invoices. This is particularly important for small companies with hundreds of bills. Another SME that is coming onboard has 20 staff managing about 30,000 invoices from 2,000 customers a month. In the future, the Validus dashboard will track every payment in real-time for the company.

Validus aims to bring six SMEs into the programme this year. Growth is expected to accelerate next year. “Visa is getting us the customers,” says an excited Raikar. “Visa has a partnership with this large bank in Singapore, which has about 20,000 SME customers. [A significant number has] sales of between $20 million and $100 million, which [fits into] our programme.”

Potential in crowdfunding SMEs
Raikar thinks there is plenty of untapped demand for credit in the SME market. About 60% of the country’s GDP comes from SMEs, which hire 70% of the workforce. Yet, very few sizeable bank loans go to SMEs, he says. “This means there is an enormous working capital gap that is not being addressed.” Tapping invoice financing platforms such as Validus allows start-ups to expand more rapidly, Raikar adds. For instance, they can buy supplies in bulk with the additional liquidity. This might allow them to qualify for bulk discounts.

Validus is just one of many crowdfunding players trying to fill this working capital gap. While competition is intense, all of them claim business has been brisk. Invoice crowdfunding platform Capital Springboard has funded $165 million worth of invoices since it started here in 2015 through to end-July. CEO Roger Crook expects the company to double in size every year for the next five years. Capital Match, which has pivoted from offering loans to SMEs to funding invoices, says the number of transactions on its platform has increased almost every month since September 2015 and that it has raised more than $50 million.

According to Validus, its SME customers have saved an average of $50,000 in finance interest in the last 12 months. Many clients had used money lenders, which charged 3% to 5% a month, before they came to Validus.

The difficulty in funding SMEs lies in the risk of bad debts. Unlike banks, crowdfunding start-ups do not take collateral. They may also fund small companies with barely any credit or earnings history.

To protect its investors, which include hedge funds and family offices, Validus has engaged an insurance company. Investors will receive 90% of their capital when a debt turns sour. Validus has a 3.5% bad debt rate. Each investor has invested an average of $250,000, and Validus takes a 20% commission from them.

Deploying better analytics
While SMEs might rejoice at having more financing options, is there any money for investors in Validus and other crowdfunding platforms?

Some industry watchers believe debt and invoice crowdfunding platforms do not really offer anything very different from what is already available via the banks. As a result, margins will not be lucrative. So, they have to leverage technology to better price credit and secure financing to grow their loan books, says Adrian Ch’ng, co-founder of venture capital firm Fintonia Group.

Validus intends to use big data and sophisticated algorithms to approve SMEs more quickly while mitigating risks. The company recently raised US$3 million ($4.1 million) from Tema sekbacked Vertex Ventures and US$600,000 from angel investors at an undisclosed valuation. About 65% of the investment will go to tech development. “Now, we can fund about $200 million worth of deals a year,” Raikar says. “We are investing in market and risk analytics.”

Validus is trying to map out the life history of hundreds of local SMEs. Raikar says, “We [want to be able to] tell when an SME has won a contract, received a payment and had a litigation case. We hope we will be able to map out 15% of [all active] SMEs’ full life history in the next two years. This is more than any bank in Singapore.”

The start-up has six data scientists crunching these numbers at a bare-bones office at The Arcade. With more data, Validus can speed up the risk-and-compliance process for loan approval. It can also predict business growth and potential contract wins for SMEs, which will allow it to pre-approve loans before the SMEs even win the contract. “Data analytics is likely to be what will set [one funding platform apart] from another,” says Nahata. “We will be profitable in time, but that is [some] two years from now.”

This article appears in Issue 795 (Sep 4) of The Edge Singapore which is on sale now