Wealthy individuals have been spending millions of pounds to buy up companies’ unpaid invoices via online auction sites – in the latest example of investors taking a do-it-yourself approach to seeking better returns.
Data from the UK’s two auction-based invoice trading platforms show that individual and corporate investors have been advancing about £6m a month to cash-hungry businesses, by directly purchasing their outstanding invoices at a discounted price.
Investors can use the platforms to browse invoices ranging in value from £10,000 to £650,000, and make a bid to buy them at less than their face value. If these invoices are eventually paid in full by the debtors, the purchaser stands to make a profit.
Anil Stocker, co-founder of MarketInvoice, the first such company to launch in the UK, said potential returns stood at 12-15 per cent a year, before allowing for bad debts.
MarketInvoice quotes a payment default rate of 1.2 per cent.
“We have had a lot of inbound inquiries from high net worth individuals, family offices and hedge funds looking to invest in alternative finance platforms,” he said.
He estimated that wealthy individuals accounted for about 40 per cent of the 75-strong client base MarketInvoice has built up since its launch in 2011.
Mr Stocker said the appeal for these investors was the opportunity to make higher returns than are available from conventional corporate bonds or loans, in a shorter timeframe. Invoice investors usually receive payment in 30-120 days.
“Effectively, an investor is pre-funding a payment from a large company which has a very low chance of defaulting,” Mr Stocker argued. “They are not taking a pure credit risk on the underlying small business. The real risk is more around trade disputes between supplier and end debtor.”
Many of the companies selling their invoices are suppliers to corporations such as Sony, Apple and British Airways, Mr Stocker said.
Platform Black, an invoice platform that launched last year, said that its investor base of wealthy individuals now accounted for two-thirds of the total.
“What we’re finding is that the high net worth investors that have come on board are allocating more assets into it . . . as the confidence [in investing in discounted invoices] increases,” explained Colin Levins, chief executive.
Platform Black said it has advanced £12m to companies since last summer, and that investors could expect to make average annualised returns of 10-15 per cent.
However, some wealth managers have warned about the risks for investors.
“With new investments like retail bonds, mini-bonds and peer-to-peer lending, investors need to understand the risks and not overcommit,” said Danny Cox, head of financial planning at Hargreaves Lansdown, the investment broker.
He added: “If something is paying you a high rate of interest, there must be risk to capital attached.”