Most fintechs addressing the financing gap for trade finance have focused on the needs of small businesses: Qupital in Hong Kong and Capital Match in Singapore are two examples. Hong Kong’s Velotrade is taking a different approach: it thinks invoice financing is above all a means to create a new asset class. Therefore, to attract more investors, it is attempting to institutionalize the space by making itself regulated.
Last month, the company obtained a Type 1 license from the Securities and Futures Commission, enabling it to deal in securities.
“We are the first trade-finance platform to have an SFC license,” said Vittorio De Angelis, co-founder and chairman. “It takes regulation to make this a recognized asset class.” He says it took Velotrade 20 months to win the license.
The receivables are not securities, but once Velotrade splits it into tranches, it creates a “collective investment scheme”, which under SFC rules counts as a security, said Gianluca Pizzituti, co-founder and CEO.
Tranching invoices makes them more accessible for smaller investors (Velotrade actively seeks larger companies to borrow on its platform, rather than small businesses.)
Velotrade’s investors are a mix of hedge funds and wealthy individuals who must commit a minimum of $100,000.
An added benefit of the license is to make it easier for Velotrade to get on fund management companies’ accepted-exposures lists.
For a fund house, the level of KYC work they have to do with a regulated platform is much lower than an unregulated one.
“When we talk with hedge funds, the second question they ask is, ‘Are you regulated?’” he said. “And when we say yes, all of a sudden, it’s a different story.”
Terms of trade
The platform offers short-term exposures, averaging 55 days, with an annualised return of 5% to 9%; this is modestly higher than what a corporate bank yields on its SME trade finance, a banker told DigFin.
More interestingly, invoices have low correlations to other types of assets. Velotrade’s founders argue that this should make it an attractive destination for funds looking for diversification.
DigFin spoke with several investors: a hedge fund manager in Hong Kong says the idea of invoice financing is interesting, but the fund was holding back because the space is largely unregulated. A treasurer at a local utility company said the same thing. This suggests there could be potential buy-side interest in a regulated version of invoice finance.
Velotrade execs say the minimum ticket size on its platform is now $50,000, but they would not reveal volumes. It is still building its borrower users.
Angelis says the company is pitching corporates that have periodic need for alternative sources of financing.
One is corporates that face macro uncertainty, such as oil companies that can be exposed to sudden changes in how banks rate their credit risk (following, say, a sudden drop in the price of oil).
Another target borrower type are manufacturers in China, whose exports are seasonal, with boom periods that require credit facilities with banks to be renegotiated – a lengthy process. They are also vulnerable to sudden changes in the central bank’s monetary policies and attitude toward cross-border capital movements.
Velotrade is opening an office in Shenzhen to service the mainland manufacturing segment. It will find steep competition there, not least from Onetouch, a unit of Alibaba that offers online financing for Chinese exporters.
How it works
Velotrade’s platform is a fixed-price auction. Sellers (borrowers) complete a KYC/due diligence to access the platform, which also verifies transactions, attaches a yield to each, and can tranche invoices if requested. Euler Hermes, a unit of Allianz, provides insurance for each invoice.
Investors (lenders) can view relevant invoice data, including Velotrade’s proprietary deal analyses, and bid over a laptop or a mobile device. Typically these deals conclude in minutes but some take up to two days; investors can cancel bids within one hour. Each transaction is verified with the borrower before a deal settles, to ensure against fraud.