It has been about seven years since the first group of invoice trading companies emerged. Many of these invoice trading companies offered the same experience to small business owners as the factoring companies before them. They used the same financial terms, and the same set of procedures and documentation requirements as a factoring company.
They managed to digitize rather than reinvent the paper-based system that came before them.
Since 2009 there have been a great number of changes. Government regulation is clearer than before, what was once called alternative finance has become mainstream finance, and recently the world awoke to discover how the blockchain will change the way future platforms are built.
There are a few dynamics and nuances that make our marketplace different from either the factoring companies of yesteryear, or other invoice marketplaces and cryptocurrency invoice marketplaces of today. These features make it uneconomical for small business owners and investors to trade outside our marketplace, and provide a defense against existing and new entrants.
Small businesses can invite their friends and family to invest in their invoices. By investing marketing dollars into attracting small business to the marketplace, LendingStar simultaneously acquires investors. During sign up, many small business owners can nominate family and friends who are prepared to become an investor and buy part or all of their invoice. This is expected to halve marketing costs.
Liquidity is key to the marketplace’s survival. Many existing P2P lenders and crowdfunding providers in Asia have relatively low transaction volume. Today a combined US$2.6B has been issued by six crowdfunding platforms since the first platform launched in Malaysia at the end of 2015. P2P lender volume is underwhelming.
LendingStar plans to ensure liquidity by buying up to 30% of invoices listed by small business owners. The marketplace accelerator will stimulate trade, create interest among investors, and help get invoices fully funded.
During a single financial year, the marketplace accelerator can be reused four times. This is because the maturity of an invoice is typically 90 days, providing a 1:4 leveraged investment. The SoFi, Earnest, and Avant marketplaces also use some of their cash reserves for this purpose.
“The marketplace accelerator will stimulate trade, create interest among investors, and help get invoices fully funded.”
Crowd buying or fractional buying creates more opportunity for larger invoices to be bought quickly. For example, the marketplace accelerator buys 30% of an invoice immediately. A retail investor buys 50%, and a second retail investor who follows the first investor contributes the balance.
Many competing marketplaces do not permit crowd buying, increasing the chance that investors and sellers are mismatched.
During on-boarding we encourage investors to set up a buy profile that will automatically reinvest their money. This means automatically bidding on or buying fixed price invoices. In addition, investors can choose to make their trade public so other investors can follow and make similar investment decisions.
The marketplace is perfect for simple investors looking for a safe return on bank deposits. LSX provides the liquidity for an investor to sell their asset before maturity. This will be available to LendingStar marketplace investors, and investors who invest through third-party marketplaces.
We will talk more about LSX in our next post, and how all alternative marketplaces can take advantage of LSX.