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 request financing 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 or invoice financing 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 or a receivables seller defaults on a facility, we would typically communicate the situation to both the borrower / seller 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 or invoice financing 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.
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.
All investors’ funds are kept in a custodian trust managed by Watiga Trust (WT), an independent MAS-registered trust company. WT is the trustee for the benefit of the investors. In the unlikely event that Capital Match is subject to insolvency proceedings, all agreements between borrowers and lenders keep its validity and WT will continue to collect repayments from the relevant debtors until the full settlement of the outstanding debts. Debtors on receivables are legally obliged to continue paying on receivable debt and investors should continue to receive repayments on investments.
In the event that WT is or is likely to become insolvent, MAS has various rights under Part IIIA of the Trust Companies Act, including but not limited to assuming control of and managing WT directly or indirectly.
As with every kind of financing, there are risks associated with receivables financing. The major risks of investing into receivables financing are set out below:
Invoices or purchase orders submitted to Capital Match may be forged. While Capital Match checks submitted invoices and purchase orders directly with the debtor, it is possible a forged invoice or a purchase order may slip by undetected.
b. Non- or insufficient payment from the debtor (notified basis):
In cases where the debtor has been notified of the financing arrangement, the debtor while being obliged to pay directly to Capital Match, may 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 receivables seller instead (whereupon Capital Match will need to collect payment from the receivables seller);
- There is a legal dispute between the receivables seller and the debtor, or the receivables seller has not performed all its obligations under the contract, and hence the debtor refuses to pay the invoice;
- 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 request that the seller repurchases the receivables);
- The debtor goes bankrupt.
c. Risks where debtors are not notified of the assignment of the receivables:
Where the debtor is not obliged to pay Capital Match directly as the debtor has not been notified of said assignment of receivables and therefore pays the receivables seller directly, there is an additional risk that the receivables seller may try to prevent the transfer of monies to Capital Match and may try to keep the funds to themselves. Also, if the receivables seller becomes bankrupt before the receivables are paid, the debtor might decide not to make payments at all. Even if the debtor makes payment, Capital Match may have limited access to such funds.
d. Risks of purchase order financing:
The additional risk inherent in purchase order financing is that the receivables seller may default in its performance of delivering goods or services to the debtor as per the purchase order or contract requirements. If the debtor decides not to accept goods or services from the seller, there may be no valid invoice in such a transaction. If that happens, Capital Match will request, on your behalf, that the seller buys back the purchase order.
e. Bankruptcy of the receivables seller:
If the seller goes bankrupt, the liquidator winding up the business is in a position to claw back any payments made by the seller or the debtor to Capital Match up to 6 months prior to the winding up order. Capital Match reviews the financial situation of all the sellers and makes every effort to reject any applicant for receivables financing services that may be on the brink of a bankruptcy.
Where we are unable to secure payments from the debtor, Capital Match, on your behalf, exercises the right to request that the seller buys back the receivables. In addition, the director(s)/partner(s) of the seller personally guarantee the performance of the receivables.