Investment risk can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. This means that investors should consider the risks of an investment before committing their money in facilities on Capital Match's platform.
While Capital Match has its own credit assessment team to screen and allows only creditworthy businesses to borrow through its platform, the inherent risks related to investment cannot be entirely eliminated. As with all investment opportunities, investors may lose all or most of their investment or adversely affect future principal and interest payments they expect to receive.
Investing in debt crowdfunding bears a number of risks. The main ones are briefly set out below.
Facilities offered through Capital Match's platform are guaranteed by personal guarantors but not secured by any collateral, insured by any third party and not backed by any governmental authority in any way (unless stated otherwise). In the event that a borrower defaults on a facility, we would typically communicate the situation to both the borrower and investors, in an attempt to reach a settlement agreement. In an unfortunate event that the situation requires debt collection, the servicing effort will be outsourced to a third-party collection agency or a law firm will be engaged. We do not guarantee the success of the third-party collection agency's or law firm's efforts to collect the outstanding debt.
While online debt crowdfunding has been around internationally for a decade, the ability of the asset class to withstand a market recession remains untested as online platforms were not originating significant volumes during the recession of 2008. In a recession, it is expected that defaults will increase as businesses are facing financial challenges themselves. This will lead to a decrease in investor returns on both principal and interest.
There is currently no secondary market on Capital Match where facilities can be sold so if you need to liquidate your investments you will need to find your own purchaser who is also registered with Capital Match. Alternatively, you may register your intent to liquidate your investment with Capital Match and we will make an effort to find a purchaser willing to purchase your facilities. However, the success of matching you with a purchaser is subject to the availability of investors willing to purchase your loans at the time of your request.
New investors should take advantage of the $1,000 minimum investment when participating in a facility. If you invest in 1 facility at $10,000 you are running a much higher risk than if you invest in 10 facilities at $1,000 each. The reason is that one default could wipe out your gains, if you only have 1 facility.
Capital Match has had injections of cash from investors (with paid up capital of over $1,000,000 as of August 2016), but the risk of bankruptcy will always be there. In the unlikely event of a bankruptcy, there is a backup provider who will take over servicing the facilities with some expected disruption. Further, as investors' monies are held in Capital Match's bank account, the possibility of investors losing their uninvested deposit monies is there. The monies deposited with Capital Match are also not insured, nor guaranteed by any governmental authority.
Invoice financing, while a lower risk than unsecured lending, has its own set of unique risks, and the major ones can be found below:
Invoice submitted to Capital Match turns out to be forged. While Capital Match checks each and every submitted invoice directly with the debtor, it is possible that there could be a forged invoice that goes by the debtor undetected too.
b. Non- or insufficient payment from the debtor (notified basis):
The debtor on a notified basis, while being obliged to pay directly to Capital Match, can fail to pay or pays an insufficient amount. There could be a number of reasons for this:
- There is a credit note that decreases the amount the debtor would pay on the invoice;
- The debtor has overlooked the fact they have to pay directly to Capital Match and has paid to the invoice seller instead (then Capital Match needs to collect the payment from the invoice seller);
- There is a legal dispute between the invoice seller and the debtor, or the invoice seller has not performed all its obligations under the contract, and the debtor refuses to pay the invoice (which was, however, previously authorized for payment already);
- The assignment is banned (but Capital Match was not provided with all the documents that would state that) and, thus, it is not effective (then Capital Match needs to collect the payment from the invoice seller);
- The debtor goes bankrupt (however, Capital Match only accepts low risk debtors and in many cases there is a trade credit insurance in place).
c. Risks of no assignment or non-notified basis:
When the debtor is not obliged to pay directly to Capital Match (there is no assignment in place or at least the debtor was not notified of it) but pays to the invoice seller (through a joint signatory account controlled by a Capital Match officer) there is an additional risk of the invoice seller trying to prevent the transfer to Capital Match and keeping the funds to themselves. Also, if the invoice seller becomes bankrupt in the meantime (before the invoice is paid), the debtor might decide not to settle the invoice at all, or even if the debtor settles the invoice, Capital Match might have limited access to such funds (even if they are deposited on a joint signatory account).
d. Bankruptcy of the invoice seller:
If the invoice seller goes bankrupt, the liquidator winding up the business is in a position to claim any payments to the invoice seller (including the payments on the invoices factored on Capital Match platform) for the previous 6 months prior to bankruptcy. Capital Match reviews the financial situation of all the invoice sellers that are introduced on the platform and makes every effort not to approve an invoice seller that could be on the brink of a bankruptcy.
In case of any issue with the invoice performance, Capital Match has the final recourse to the invoice seller (the invoice seller has to buy back the factored invoice) and personal guarantees of the invoice seller’s directors. Thus, such facility then becomes similar to an unsecured loan.