Mintos marketplace – a loan originator’s perspective

07.03.2017

mintosblog

By Justas Šaltinis, Founder and CEO of DEBIFO | February 2017

Background

DEBIFO offers selective invoice financing services to clients based in Lithuania. We offer both confidential and disclosed invoice financing for invoices issued to large foreign and local corporations. Invoice financing allows small and new businesses holding invoices against large and trustworthy corporations to quickly turn receivables into working capital and balance cash flows.

Since its founding in May 2015, DEBIFO has financed over 1,400 invoices against a principal value of EUR 10 million. We have served over 80 small- and medium-sized businesses and have an outstanding portfolio of EUR 2 million. Our average loan amount is around EUR 5,000, and exposure to an average client is around EUR 20,000. We charge interest rates ranging from 18% to 30% per annum, with an average invoice duration of 45 days.

Do you invest on the Mintos platform yourself?

Yes, I registered on Mintos platform in February 2015, and made my first investment in a mortgage-backed loan that April – the only loan product available on Mintos platform those days. I continued to diversify across different loan originators until DEBIFO and Mintos signed our cooperation agreement in January 2016. Since then, my portfolio has purposely drifted towards our own product and now DEBIFO’s invoices make up more than 80% of my investment portfolio.

How is your business regulated?

DEBIFO and invoice financing is not regulated in Lithuania. Nevertheless, our activities have been under constant supervision and monitoring from Mintos and Mundus, a private debt fund committed to investing EUR 10 million in DEBIFO’s portfolio within five years. On top of that, Moore Stephens, a global accountancy and advisory group, is auditing DEBIFO’s financial figures for 2016.

What does the loan issuance process look like?

The assessment includes three parts – the client, the purchaser and the relationship between the parties. After we receive an application, we gather information on both the client (shareholders’ history and experience, detailed financials, payment history, aging of receivables, etc.) and the purchaser (i.e. the party that is due to pay the invoice) from numerous credit bureaus. Based on this information, industry insights and previous purchaser’s payment history to other clients, we prepare a preliminary offer. Our credit risk department requests additional information from the client to complete the application process. After we receive the all necessary data, we calculate a credit score for the client and the purchaser. Invoice financing requires supervision from our team to ensure that invoices are assigned and paid to our controlled bank account. This process requires certain manual checks, so the loan issuance process is not fully automated.

Our invoice financing product has  a high level of security. We have a claim against the purchaser, recourse against the company (i.e. if the purchaser does not pay, the borrower is obligated to cover the unpaid invoice), and personal guarantees from the borrower’s shareholders or directors that provided information is accurate. Additionally, some clients sign personal guarantees against the invoice to receive a more competitive financing offer. Our product structure also offers protection in the event of the borrower’s bankruptcy, as DEBIFO is able to bypass the bankruptcy administrator and have a direct claim against the purchaser.

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What has been your experience with repayment discipline?

Invoice payment discipline depends on the industry and the purchaser’s size. Large and multinational corporations have automated payment systems that make payments on the exact invoice due date, but even some large local businesses still make payments manually and adjust them according to the existing relationships and power balance between suppliers and buyers in the sector.

Our internal statistics confirm that purchasers are likely to extend payment terms by at least 1-15 days. Data shows that prepayments by the purchaser or repayments by the borrower account for 34% of all repaid invoices, invoices paid on the due date comprise 8%, payments within 15 days past the due date constitute 39%, invoices paid within 16-30 days account for 14%, and the remaining 5% of payments are made later than 30 days after the term.

What happens if a loan defaults?

We constantly monitor aging invoices and take necessary action if there is a delay in payment. We often secure personal guarantees, claims against receivables from other companies or other securities in the event of severe delay. We conduct “soft collection” procedures in-house to find the most suitable solution for all the parties involved. If we are unable to recover the funds in 60-90 days, we proceed with a “hard collection” process, using an outside debt collection agency, including bailiffs and courts.

Why do you use Mintos instead of other types of financing?

We use various financing sources to diversify our capital base and maintain flexibility. DEBIFO currently uses shareholders’ funds, private debt from high net worth individuals, debt instruments from our institutional investor Mundus and invoice sales through Mintos.

DEBIFO has increased invoice offerings on Mintos in recent months. Can we expect this trend to continue?

In 2016 DEBIFO’s portfolio increased fourfold to EUR 1.2 million. We have managed to tick growth in the outstanding portfolio in 10 out of 12 months, and the last few months are very strong for our team and origination engine really kicked in. In December and January alone, our outstanding portfolio increased by EUR 266,000 and EUR 271,000, respectively.

As DEBIFO’s client base grows and loan demand picks up, we will continue to increase invoice offerings on the Mintos platform, potentially offering up to EUR 2.5 million in invoices in 2017.

Why are DEBIFO interest rates lower than other buyback loans?

Average interest rates remained in the range of 12-13% until the fourth quarter of 2016 and slightly decreased thereafter to 11-12%. Our short-duration loan product has allowed us to pivot and constantly improve operational and credit risk management procedures to reduce the level of overdue invoices and defaults.

Overall, our invoice financing product holds a very different risk profile than consumer loans or loans to new businesses with a minimal sales history, for example. It is a short duration product issued against the second most liquid asset in the company. Its risks are mitigated not only by evaluating the solvency and integrity of the borrower, but also by inherent exposure to a purchaser, typically a large corporation. Therefore, we believe that our invoice financing loans are the best risk-adjusted investment option on Mintos.

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