Velotrade, a startup based in Hong Kong’s Cyberport, is looking at opening a sales office in Kowloon to get closer to the small- and medium-sized enterprises necessary to fuel its business.
Vittorio De Angelis, co-founder, says this is part of a gradual expansion: the company, which has developed an electronic platform to buy and sell invoices, including moving its technical development from Switzerland to Vietnam, which offers a good supply of qualified engineers in the same time zone.
The company’s long-term goal is to turn SME invoices into an asset class for hedge funds, banks’ structured credit desks, family offices and institutional investors, says Gianluca Pizzituti, co-founder.
One early user of the platform, who invests money from his personal account, praised it for convenience, ease of use, and provision of good information about the invoices for sale.
Speaking anonymously to DigFin, the investor said, “I can get a 6% yield on three-month deals. To get that kind of return in fixed income, you’d need to have a duration of five or six years. So this is good for me.”
The only hitch: lack of supply. “It’s still ad hoc,” the investor told DigFin, noting that he relies on Velotrade’s principals to source deals and notify him when there’s a suitable trade on offer. There aren’t enough deals in his preferred size to warrant visiting the Velotrade website every day.
De Angelis says the reason for creating the platform was that by digitalizing factoring (the purchasing of company invoices at a discount and collecting payments due), it can create scale.
For now the service is being pitched to SMEs, many involved in global trade links between China and the West, which routinely face cash shortages and can’t obtain bank financing, even at very high rates of interest.
Post-2008 regulations and capital charges on banks have seen many of them pull back further from SME lending, creating even more potential users for Velotrade’s platform.
Velotrade will typically buy invoices and advance around 80% of the value to the seller right away, with the rest paid out once the invoice finds a buyer, minus Velotrade’s fee. “We want them to keep some skin in the game,” De Angelis said.
He says the business is capable of doing large deals. “We’ve done tickets up to $20 million,” he said, noting the potential sellers are not just SMEs but also larger companies that are concerned of being frozen out of traditional bank loan facilities, or who want to diversify their funding sources.
The co-founders declined to say how many users are now on the platform, which launched in 2016, or what kind of volumes they’re getting, although De Angelis says the goal is to be transacting over $100 million a month. “Volumes are increasing, but I don’t want to give false expectations to our investors,” he said.
Price versus liquidity
One part of the company’s competitive advantage is its pricing engine. “We know the Street price” for a given invoice, De Angelis said (he and Pizzituti have twenty years’ experience each as equity derivative traders and brokers). Their algorithm determines a yield and adds or deducts a spread.
The anonymous investor says it is very attractive to earn 5% to 7% on cash-like instruments.
But other investors are more interested in liquidity than yield, De Angelis says. “Some of our investors ask more about how we can fulfill their liquidity needs,” he said, such as hedge funds with letter-of-credit exposures.
Deal quality has also helped the company attract investors. So far it only purchases invoices from Hong Kong-based companies, so they are operating under Hong Kong contract law. Moreover, the deals are reinsured by Euler Hermes, a trade credit insurer, so investors have protection if the ultimate payer of an invoice doesn’t come through.
The coming expansion
Such benign conditions may not be repeated in other markets. De Angelis says the company will look to expand to other Asian markets by late 2018 (and, later, China), with a Series A financing a possibility to pay for the required marketing and salespeople.
For now, however, the focus is on the Kowloon opening and getting more Hong Kong SMEs to sell invoices.
And at some point, Velotrade hopes to develop relationships with banks. As with other invoice-trade businesses, it speaks with banks about taking on SMEs the banks want to stop lending to, but without burning bridges – so offering them financing via a platform like Velotrade can ease the pain of being cut off from traditional lending.
For investors, cutting out banks to invest in invoices is welcome anyway. The anonymous investor told DigFin that one advantage to a platform like Velotrade is it’s simple to use and offers lots of granular information about the assets, whereas trying to trade these with a bank involves a lot of paperwork, calls, emails, and back-and-forth.