Perhaps the biggest improvements in invoice trading can be found in the way the LendingStar marketplace rewards investors. These measures make investing in alternative finance more appealing than before by decreasing risk.
LendingStar is chasing a different type of retail investor. There are also a number of other features that make the marketplace a better place for investors.
Our definition of a retail investor is a mother, father, or millennial. This is a person who does not want to invest in high-risk investment like stocks or crypto, but is looking for a short-term solution that protects their nest egg and offers returns that are higher than a term deposit with a bank.
We want to create what Clay Christensen calls a “non-customer.” This is either a person who never bought invoices before, or a small business that has never sold invoices before, because the process was inconvenient. Marketplaces like eBay, Airbnb, and Uber have been successful because they create buyers and sellers who never existed before. In 2015 Airbnb brought in $60M in extra revenue to San Francisco from rooms rented through their platform – revenue created by buyers and sellers who did not exist before Airbnb.
When you loan money, the risk of default is calculated against the small business. Many small businesses have a short trading history, and for the ones that do hold financial records, verifying these records is time consuming, so the interest charge will be high. A better proposition is crowd buying invoices.
The risk of buying an invoice is calculated against a multinational company with a better credit history and who is compelled to pay the invoice. We look for A grade invoices to large, well-known multinationals that pose small default risk. The firms have a zero default rate – the equivalent of a government.
The buyer can elect to add insurance to their shopping cart before checking out. The cost of insurance is very small – a few dollars, calculated against an A grade debtor. We have shortlisted several insurance companies who will offer a worldwide solution. Eventually we will build the insurance directly into the product.
Many invoice marketplaces claim that invoices are bought and sold, but rather invoices are loaned against. A loan is not as strong as ownership. Every country has laws that support the legal transfer of ownership of an invoice. An invoice is treated as an asset on the balance sheet and continues to be treated as such after ownership is transferred. In the past, legal transfer was expensive and time consuming. We created the Exchange Trade Receivables Agreement, or ETRA, to address this problem.
When an invoice is sold to an investor, the small business has no legal claim. The investor becomes the rightful owner. The funds are paid by the customer into the marketplace trust account and settled between the marketplace and investor. In a P2P lending, you are required to wait (and pray) for the individual to settle with you, as the platform takes no responsibility for collection.