LendingStar 101
For those who are not yet clear on what LendingStar is or how it can help small businesses, we will attempt to explain everything in this post. First thing first, as we get this a lot: No, we are not a bank, and we don’t do loans.
So, what does LendingStar do then?
We provide a marketplace finance, which is something you won’t find anywhere else (yet) in Malaysia. Surely, that last sentence needs further explanation. So, here it is:
A marketplace simply means a place where buying and selling occur. Buying is done by the investors, whereas selling is done by small and medium-sized enterprises, or SMEs. Obviously, there needs to be something that both parties are trading on the marketplace for them to participate in it, and on LendingStar, it is invoice.
Buying and selling invoices? Why would someone want to do that, right?
The answer to that is simple: money. Buying an invoice allows investors to make money, whereas selling an invoice allows SMEs to also get money — -which where the word ‘finance’ in ‘marketplace finance’ came to be. Here’s how it works:
- For SMEs
As an SME owner, you issue an invoice to your client/ buyer when his or her company buys products / services from your company. Included in the invoice will be the descriptions of a list of products sent / services provided, a statement of the sum due for these products / services, and the payment terms. The payment terms will be usually along the lines of 30, 60, or 90 days — — meaning products delivered/ services rendered are expected to be paid within these days.
So far so good. However, most SMEs can’t afford to wait that long to receive payment. In most cases, they need it as soon as possible, and that’s why selling invoices makes perfect sense.
Can you tell us more?
Unlike a loan which requires the borrower to pay the loan back with interest, a sale of course does not. You sell your invoice on LendingStar’s platform to participating investors, and that’s it; you get money right away from the sale. Which form of financing is better for SMEs then, we leave it up to you to decide.
But besides that, another benefit — -which may not seem so obvious — -is that a loan will also appear in a company’s balance sheet as a negative whereas an invoice sale will turn it into a positive, thus improving the company’s balance sheet.
A balance sheet represents a snapshot of a financial health of a company, and the stronger it is, the more likely a company is in good financial health. And if a company is in good financial health, the easier it will be for it to move forward. (For example, it will be far easier for it to gain access to financing from the formal banking sector, support its expansion plans, and improve the profitability of its business compared to one that isn’t.)
Are you with us so far? Let’s take a 5 sec break. Here’s a gif of a man smelling a pack of delicious Oreo cookies.
Up until this point, we have only covered why SMEs would want to sell their invoices on LendingStar marketplace finance, but we haven’t yet covered why investors would purchase them. So without further ado, here they are.
- For Investors
The main reason why investors would like to purchase an invoice submitted by an SME is to earn money, as mentioned earlier. Here’s how it works.
When investors offer to buy your invoice, they will offer to buy it at a discount in every case. They must because without buying it at a discount, they won’t turn a profit from it. For example, for an invoice amount of RM50,000, investors may choose to buy it for RM45,000, RM44,000, or even RM44,001, depending on them, thus making a profit from the price difference.
Note: If you are wondering why the plural of investor is being used above, investors, instead of the singular, investor, that’s because more than one investor can purchase your invoice. This is known as fractional investing, which is an excellent way to diversify risk, and the min amount for an investor (singular) to get started on LendingStar is RM100.
Can you show us a real life example?
Sure, take a look at the invoice above. In this example, the investor bought the invoice amount of RM50,000 for RM48,457.33 (B). Therefore, the investor made a profit of RM4,542.67 (RM50,000 — RM48,457.33), or 3.09% (A), within 83 days.
A 3.09% yield within 83 days may not seem much, but if you annualised it, meaning recalculating it as an annual rate, that makes it to about 13.59% per annum. To put this rate into perspective, it’s more than fixed deposits, stocks, or mutual funds, which is why many investors are opting to make invoice investments here on LendingStar.
Are invoice investments risky?
Of course all investing involves taking some form of risk, and we will be lying to you if we say there isn’t any. However, invoice investments on LendingStar are considered safe for the following reasons:
i) All uploaded invoices by SMEs on LendingStar’s platform are verified and vetted by LendingStar before they are made public on the marketplace.
ii) Besides vetting all SMEs’ invoices, LendingStar also screen the SMEs and the clients/ buyers outlined in the invoices.
iii) All payments are never held in LendingStar’s account but in an escrow account, managed by TMF Group. This means in the event that LendingStar is insolvent, investors’ funds will not be affected.
iv) LendingStar allows fractional investing, which means investors can invest in just parts of an invoice, or invoices. Invoice investments start from RM100.
Other questions you may have at this point.
As an SME owner, after selling your invoice, does this mean you no longer collect money due from your client/ buyer outlined in your invoice?
That is correct. By selling your invoice to investors on LendingStar, you no longer have ownership of it.
Who does my client/ buyer pay to then?
After successfully selling your invoice, your invoice no longer belongs to you but investor(s). As a result, your client/ buyer will pay the amount due to the new invoice owner(s), investor(s), which entire payment process is done electronically and facilitated by LendingStar.
Does this new payment arrangement negatively affect the existing relationship between SMEs and their buyers/ clients?
No. In fact it has quite the opposite effect. That’s because the SMEs’ clients/ buyers can extend their payment terms to investor(s), which they may find it difficult, or impossible, to do when dealing with SMEs. In addition, they may also receive discounts in exchange for paying earlier to SMEs via Dynamic Discounting.
Since an invoice sale involves the transfer of ownership, does this mean SME owners need to notify their clients/ buyers about it?
No. LendingStar will do everything on behalf of SME owners. All SME owners need to do is sign up and upload their invoices on LendingStar’s platform for investors to bid for them.
There are two finance solutions currently on offer on LendingStar: Invoice-to-Cash Financing and Dynamic Discounting. Which one should an SME owner select?
Actually, it doesn’t matter. What solution SME owners use depends more who’s offering to pay them rather than what SME owners select themselves. In fact, there is no selection necessary.
If the payment offer comes from investors, we call it Invoice-to-Cash Financing. Whereas if the payment offer comes from the clients/ buyers, we call it Dynamic Discounting. In either case, both solutions will help meet SMEs short-term financing needs, which is what SME owners are interested in anyway.
Moreover, both solutions will also be made available to SMEs once SMEs have successfully uploaded their invoices. Which means that’s all they need to do to start benefiting from them.
Still Confused?
If by any chance that you are still not clear on how LendingStar can help you as an SME owner or investor, you can contact us here
A real person will get in touch with you, and you can ask him or her anything. Yes, all questions are welcome, and we would be more than happy to answer them.
