All investors of Borza terjatev have received the quarterly report 04/2017. If you did not, please contact email@example.com.
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Dear CONDA investors,
2017 has ended and with it also our second full year of operations. I wish to take this opportunity to provide you – in addition to our regular quarterly reports – with a bit more insight into what is going on at the Invoice Exchange as well as some of our plans for the future. My partners and I highly appreciate the support which you extended us by participating in our CONDA campaign back in 2016 and we trust that you will appreciate some hands-on information – as we would ourselves if our roles were reversed. I hope you enjoy the read.
First, here are our quarterly and annual performance numbers:
And here is the same data presented in two charts:
Overall, last quarter was our best to date – the total volume of invoices traded increased +9.2% relative to Q3 2017, but I believe even more important are the increases in our fee revenue (+18.5%) and the total of our investors’ portfolios (+30.1%). If we can keep up our current momentum, we should be breaking even on our operations in the first half of 2018.
As you can see from the data table above, we had a total of 68 trading clients in Q4 2017 as opposed to a total of 121 trading clients in the whole of 2017 – the difference being that not all of the clients who used our service in 2017 also traded in the last quarter. This is partly due to seasonality on the side of SMEs who sell invoices but also partly due to churn, however it is often difficult to distinguish between the two without enough historic data. Now that we have two full years of data behind us we are going to start applying our brainpower to sort this issue out and see what the actual churn rate of our clients is and what we can do to reduce it.
Our year-on-year growth looks even more impressive however I must be honest in pointing out that it is always easier to grow at an early stage when you are starting off from a low base. Our annual trading volumes increased from €2.8m in 2016 to €13.6m in 2017 (+379.6%) while our trading fees grew from €16.8k to €76.9k (+358.1%) and the balance of our investors’ portfolios went from €1.3m to €4.3m (+242.6%). I am not certain we can repeat the same growth levels in 2018, but I won’t take anything below €35.0m in terms of annual trading volumes for 2018 – that should put us on the tail of the top five factoring players in Slovenia. We will aim for the head, however.
In our line of business there are two principal types of risk that we have to manage. These are credit risk and fraud risk:
Credit risk, in short, is the risk that a valid and undisputed invoice is not paid due to inability rather than due to unwillingness. All trades executed through the Invoice Exchange platform carry recourse to the seller company which means that credit risk also extends to the seller company – if the debtor cannot pay, the seller is still obliged to settle the bill. A default will only occur if neither the debtor nor the seller can pay.
Fraud risk, on the other hand, represents the risk of losing money due to fraudulent activity. Generally, the risk of fraud being committed by the debtor company is fairly low, but the risk of the seller company placing a disputed or even a non-existing invoice up for trade is quite real, especially in silent trading where the debtor company is not notified.
Although the Invoice Exchange does not guarantee payment of the invoices traded through our platform, proper credit and fraud risk management is paramount for our business. While we are sure to encounter individual cases of default and fraud as we grow – that is just the nature of the factoring industry – if we do not apply strict diligence to our risk management processes and start losing investors’ money hand over fist, our investors will flee and our business will be no longer.
For this reason, our proprietary risk engine is designed to detect and mitigate both credit and fraud risk. The Invoice Exchange is directly integrated with Bisnode Dun & Bradstreet databases and we are able to run on-the-fly risk checks on any incorporated company with a click of a button. Things like checking their financial data and credit scores or looking up any overdue taxes and social security filings for their employees, etc. Our risk engine will detect not just if a company has filed for insolvency but will also know if a director of a company is in personal bankruptcy proceedings or if he or she has been associated with other companies which have become insolvent. Furthermore, our risk engine will check for any affiliation between debtor and seller companies and will automatically set trading limits to cap exposure. We also run strict know-your-client and anti-money laundering checks on all companies who register on the Invoice Exchange to make sure that our clients really are who they say they are and are not engaged in any dubious activities. All of these policies are designed to minimize credit and fraud risk for our investors.
So far, our risk engine has produced satisfying results – with a cumulative trading volume of €19.2m to date, we have had only two cases of default – the first case involving two fraudulent invoices where our exposure at year-end stood at €11k and the second case involving a partial off-set of a number of invoices where our exposure currently totals €138k.
In both cases, we are collecting the remaining balances from the sellers of invoices (not debtors). Case #1 is smaller but more problematic because the company in question does not have any specific assets and is on the brink of bankruptcy. However, we have so far collected almost 70% of the nominal value of our investors’ original exposure – the last payment we received was in October – and remain hopeful that we will succeed in collecting further amounts. But in full honesty, we feel that there is a realistic chance of about a 25.0% crystalized loss (roughly €9k). Default case #2 is larger but less problematic because the seller company is in much better shape – in fact it is a profitable growing business, has a solid credit score and we are well secured relative to our remaining exposure. The invoices in question were valid but were partially off-set with the debtor company. We managed to recoup part of the debt directly from the debtor and have agreed a repayment schedule for the remaining balance with the seller company. So far, we have received every monthly instalment sharply on time and we expect that this debt will be fully repaid with interest. However, for the time being, some of our investors remain locked into this deal and we will attempt to arrange some sort of bank refinancing option in coordination with the seller company.
It is also appropriate to contrast this information with the overall balance of our invoice book as of 31.12.2017. Here it is:
Looking at the flow of funds, our investors financed a total of €13.6m of invoices in 2017. Average funds available – meaning the average total balance of our investors’ trading accounts in the entire year – totalled €3.0m and these funds were on average 73.8% invested in invoices (‘deployment rate’). From these figures you can deduct that our invoices had an average maturity of 59 days and that the total investment cycle – including any delays in repayment plus the number of days it takes to reinvest the money in new invoices – was 80 days.Invoices on auction, undue and just due invoices (up to 5 days delay) represented 93.8% our invoice book at year-end. One invoice totalling €45.3k was 8 days in arrears (‘minor delay’) and another totalling €56.7k was exactly 31 days in arrears (‘substantial delay’). The latter case involves specific circumstances for the delay which we consider non-critical and we expect to receive full payment shortly. The last category – invoices in default – represent the two default cases described above.
It is informative to consider our performance from such a dynamic perspective and extrapolate a baseline scenario for 2018 from our end-of-year data. As of 31.12.2017 the total balance of our investors’ trading accounts stood at €4.3m. All other things remaining equal and assuming zero growth of our investors’ portfolios, this would imply €19.6m of trading volume in 2018. This represents the baseline minimum which is already within our reach using our existing resources. In order to increase our annual trading volumes to €35.0m, we will need to grow the average balance of our investors’ trading accounts to €7.7m. Assuming this growth would be equally distributed within the year, the total balance of our investors’ trading accounts should reach €11.1m by yearend 2018.
So how did our investors fare thus far by trading through Invoice Exchange? Here's a quick overview:
As you can see, our investors achieved roughly 5% p.a. on the funds they made available to us during the past two years. We also believe that our investors’ returns will increase somewhat in 2018 as we expect both gross returns and the deployment rate to improve.
If any of you would like to get involved as investors on our platform, just hit reply and let me know!
Taking a peek look into the future, our IT team is currently finalizing a major upgrade to the Invoice Exchange platform which we will launch in Q1 2018. We are all super-excited about how this will help us grow or business. I won’t be modest about it – it will be a huge improvement and I believe it will put rocket boosters on our little funding machine.
To give you a bit of an insight, the whole concept of the Invoice Exchange revolves around automation and removing friction. We are disrupting the factoring industry by digitalizing invoice finance and making it readily available to anyone through an on-line platform. Factoring involves a lot of SME clients selling a lot of invoices issued to a lot of debtor companies, who in turn are bought by a lot of investors. If you don’t have your processes streamlined and automated, your overheads will kill you and you won’t be able to scale your business. It’s as simple as that.
We were well aware of that fact from Day One at the Invoice Exchange and we built our service around this concept of process automation. Still, it is impossible to foresee everything and after two years of operations, we realized that we needed to upgrade our platform to continue growing.
So what exactly is this ‘new’ Invoice Exchange platform going to do? Here’s a list of the key new features:
Fractional trading – enabling syndication of multiple investors into single trades by slicing invoices into tranches (no limitations, as many as necessary). This is a triple whammy because it will sort out three issues for us: (i) it will enable better diversification of our investors, particularly small ones; (ii) it will make it much easier for us to trade large invoices by distributing them among multiple investors; and (iii) it will increase the deployment efficiency of our investors’ funds which in turn will improve their overall returns. If anyone is wondering how to split a €100,000.00 invoice equally among three investors without losing out €0.01 give me a call and I will tell you a neat story about how we will handle cent adjustments.
Fully automated trading – currently, we use an auction trading system as a mechanism to match SMEs and investors. Auctions run 1-5 days and investors can submit their bids manually or they can use our auto-bidding tool to set their investment preferences and let our system bid on their behalf. After the upgrade, we are going to require all investors to mandatorily use our (enhanced) auto-bidding tool. It will no longer be possible for investors to pick-and-choose specific invoices – instead, they will set their investment preferences such as maximum exposure to any counterparty, maximum invoice maturity, required investment return for any given credit score, etc. and will then rely on our system to place their money into trades. Why is that good? Well, we have learned in the past two years that the vast majority of our investors are passive investors who don’t really want the hassle of actively trading on our platform on a day-to-day basis. Furthermore, requiring all investors to use our auto-bidding tool will enable us to spot-price any invoice based on our investors’ preferences, making auctions redundant. When an SME client will enter their invoice details to initiate a trade, they will simply click a button, triggering an algorithm that will comb through all of our investors’ trading accounts and their investment preferences and produce back the best available syndicated bid in a split of a second. The SME will simply accept (or not) the offer and voila! – the trade will be set. Such automation will not come at the expense of transparency though – our investors will be able to log in to our platform at any time and easily review their portfolio and the history of all trades. They will be able to change their investment preferences or simply stop trading and request their money back. Or – what we would much rather have them do – simply wire more money to their trading account with the Invoice Exchange.
Same day pay-outs to SMEs – if we can set the trade in one second, why stop there? The Invoice Exchange platform is directly integrated with the electronic banking system and all pay-outs are processed automatically. Currently, we are set up in such a way that all pay-outs are executed one day after the trade is executed on our platform. We are now going to switch into high gear and ship the money to our clients on the same day.
Enhanced user interface – over the course of the past two years, we’ve noted a number of potential improvements to our front-end user interface. Some of these ideas have come to us through feedback from our clients and others we’ve thought of ourselves but all are somehow related to increasing transparency and simplicity of use of the Invoice Exchange platform. Things like on-demand investment reports and portfolio performance charts for our investors or a simplified overview of outstanding invoices sold and direct insight into payment transactions on individual escrow accounts for our SME clients. Our back-end database already holds all this data and we are now going to upgrade our front-end user interface to make sure our clients get the full benefit of it.
From mid Q1 2018 onwards we will be able to guarantee instantaneous quotes and same day pay-outs to our SME clients. And our investors will enjoy the benefit of a lightweight yet fully transparent investment product. Highly diversified, short term, low risk corporate credit, yielding about 5% p.a. – a perfect alternative to bank deposits and money market instruments. What’s not to like about that?
Still, our ambitions don’t stop there. The Invoice Exchange currently operates only in Slovenia and our big goal is to expand abroad, primarily to other countries in the CEE region. Now that we have a proven product-market-fit with good traction we will hit the fundraising trail once again to raise additional equity or mezzanine funding for our expansion. To this end, we have already initiated discussions with a number of venture capital funds and are also considering to run a second – this time larger – crowdinvestment campaign on CONDA. We will let you know if and when we decide to do so.
In conclusion I wish to say that all the neat figures I have just provided you with did not appear out of thin air but are the result of hard work from our wonderful team here at Invoice Exchange. I truly count myself as lucky – my colleagues are the ones who put in the hours and are willing to go the extra mile to make sure that our day-to-day operations run smoothly without much of my involvement, leaving me time to plan for the future and correspond with our investors. It is a privilege to lead such a dedicated and passionate team.