Can tighter oversight curb risks in Singapore’s booming invoice finance market?

The unregulated nature of the industry leaves investors vulnerable, as a massive S $ 6.9 million fraud case revealed.

Investors are moving more cautiously after $ 6.9 million sham at Singapore crowdfunding site exposed vulnerabilities and risks associated with industry promising quick returns to seeking SMEs growth.

The move comes as a local report revealed that invoice financier Capital Springboard had sold around 60 fake invoices worth $ 6.9 million to investors in Vangard Project Management (VPM), an SME. specializing in interior decoration.

Uplifting tale
As the lion city opens its doors to SMEs in hopes of spurring innovation and attracting international talent, a number of financing methods have also emerged to meet the diverse capital needs of companies in growth. Obtaining funding was cited as the fourth biggest growth challenge for startups, only giving way to chronic labor issues and limited market size, according to a report from NUS Enterprise.

From venture capital and angel investments and traditional business loans to various incubator and accelerator programs, bill financing has become another viable financing method for cash-strapped SMEs.

Also Read: 1 in 5 FinTech Firms Believes Singapore Is Not Attracting Enough Venture Capital

Invoice financing allows companies to secure their liquidity by leveraging the value of payments owed to them by their customers for an agreed return to investors, providing them with immediately available capital to pursue new growth opportunities. Investors bear the cost of 70-90% of a company’s total invoices, which works best for a short period ranging from two weeks to a year.

Greater flexibility, easier access to finance and faster availability of funds compared to traditional bank loans are the greatest strengths of invoice financing, Dmitry Kushnirenko, founder and CEO of the online multi-currency invoice exchange platform Incomlend said Singapore Business Review.

“Businesses with tight cash flow due to large receivables or long credit terms from customers typically use this product. Historical or existing cash balances do not matter as much as repayments are secured via invoice payment, ”added Pawel Kuznicki, CEO of the peer-to-peer and invoice financing platform Capital Match.

While it would take months for a traditional lender to review a facility limit, invoice financing can disburse funds often within 24 hours and borrowers often have little or no collateral to provide, Kushnirenko added.

“A rising rate environment also makes it difficult for SMEs to obtain financing through traditional methods such as banks and scrupulous control procedures usually expose fundamental flaws in the structure of the SME,” explained Oriano Lizza, a trader at CMC Markets.

Read also: 4 out of 5 SMEs fail financing reviews

This means that the method arguably carries less risk of default for lenders than short-term financing, because the borrower has already delivered their clients with reasonable repayment expectations.

However, the method is not entirely risk-free as the fraud that collapsed with Capital Springboard revealed, especially since VPM’s invoices with CS were unreported in nature. This type of invoice financing means that the SME did not inform its clients of its working relationship with platforms like Capital Springboard, including the fact that it appealed to the financier for its financing needs.

This method of invoice financing inherently increases the risk premium, Kushnirenko noted, as the lender has little opportunity to verify the authenticity of the invoice as it is not able to confirm it directly with the buyer. .

“More often than not, this could expose the lender to fraud. Due to its very risky nature, not only does it increase the likelihood of fraud, but it also increases the risk premium and therefore the cost of financing for the borrower, ”said the founder of Incomlend.

Capital Match’s Kuznicki also suggested that while funding unreported invoices is more difficult in terms of verification, the platform is able to verify invoices as well as provide supporting documents, including delivery notes. certified and progressive claims with the buyer to ensure financing is backed by a legitimate invoice when the work has already been completed, although this is not necessarily practiced by all lenders in the market.

Regulation and risk management
The recent fraud that took place draws attention to the relatively unregulated nature of the industry which allowed fraudsters to slip through the cracks and take advantage of a legitimate fundraising method that provided the fuel for funding needed by countless businesses in the past.

While SME demand for invoice financing has not declined significantly, investors are proceeding with more caution amid calls for more oversight to avoid similar failures in the future.

“It could be argued that a company regulated by the Monetary Authority of Singapore would not have obtained[ten] so far or even implemented in the first place, ”explained Lizza. “The market is somewhat regulated but not completely, which leaves it open to exploitation and abuse.”

With this case as a catalyst, MAS could potentially reduce the number of new market entrants or step up its regulatory reach and establish stricter risk management standards to set a precedent for similar cases in the future.

While the number of approved funding requests may decline in the short term due to intensified regulatory review, the industry is poised to benefit in the long term from the common core standards and practices in place to ensure stability and transparency. of the funding process, Kushnirenko added.

Crowdfunding platforms are also doing their part by increasing their risk management capabilities. Performing regular borrower background checks, reviewing new applicants, and creating a shared database of blacklisted borrowers between platforms and traditional lenders can also do wonders in avoiding multiple financings for the same debt security, a- he added.

“Different lending platforms communicate, although officially, to ensure that stray SME owners are blacklisted by different credit teams,” Kuznicki said.

For Kushnirenko, the affair is not only a timely reminder of the pitfalls of investment but also an opportunity to improve the methods of financing SMEs.

“We believe that the industry will be called upon to come together to improve collaboration, risk management measures and common standards. This event is an opportunity for everyone to rethink and improve the working practices of the industry and we are confident it will happen. “

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