What is invoice factoring?
Invoice Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A company will sometimes factor its receivable assets to meet its present and immediate cash needs. We have provided some sources below that provide excellent information about the different aspects of invoice finance, both domestic and international.
What is Clear Factor?
Clear Factor is building an ecosystem to facilitate invoice finance for mSMEs (micro Small and Medium Enterprises) globally whereby any mSME from any country with an invoice in any currency can sell its invoices while an investor from any country can invest in those invoices using any currency.
What is the Clear Factor story?
In late 2017, the idea to create an ecosystem for invoice finance so that mSMEs have access to cheaper and quicker working capital was formed. It was based on our own experience of 2008 financial crisis when many UK banks changed their criteria for invoice finance overnight. Small and Medium Enterprises (SMEs) were given very short notices to find alternative providers and perfectly profitable businesses went under.
This trail of destruction impacting the lives of people, their families and the economy as a whole wasn’t restricted to UK alone. It was a global phenomenon with debilitating negative consequences on societies across the world that included SME owners driven to financial ruin.
We want to build an ecosystem will make it easier for SMEs across the world to access funding from a global investor community. Currently, the banks have made it extremely difficult for SMEs to use this product freely, and often, the SME doesn’t know what the real fees they are paying, until the end of the year. Besides that, nearly 99% of the SMEs have no access to invoice finance from the banks at all. Globally, banks limit their lending in general to the largest of the small firms.
Since late 2017, we have worked to bring on board some great people who share our passion and who are experts in the different facets of the ecosystem – invoice finance, underwriting, global payments platforms, regulations, debtor relationships, supply chain, SME issues, IT delivery, cyber security, cryptography, digital asset trading, token-economics and decentralised networks.
We have partnered with Decimal Factor and Electi Consulting, both as equity partners, to build the Clear Factor ecosystem. The building of our MVP is currently in progress in partnership with them.
Decimal Factor was founded in 2008 and since then has been helping UK SMEs find funding for their working capital requirements and is authorised and regulated by the Financial Conduct Authority, FCA. It has strong partnerships with lenders such as Liberis, Funding Circle, Lloyds Banking Group, IWOCA, Fleximise and Boost Capital who trust Decimal Factor lending score because of the data it has on over 670,000 UK SMEs.
Electi Consulting is an R&D firm with a team of scientists specialising in decentralised protocols, cryptography and cybersecurity, machine learning, computer vision and data science. It is also a trusted partner for R3, Corda and University College of London Centre for Blockchain Technology (UCL-CBT).
What type of clients does Clear Factor target?
There are several types of users of the Clear Factor ecosystem – Micro Small & Medium Enterprises (mSMEs), Debtors (who are the customers of the mSMEs), Underwriters, Retail Investors, Trade Investors (inc. private banks), Underwriters, Brokers and Advertisers.
What is the target industry for Clear Factor?
There are quite a few sectors suited for invoice factoring in the UK and across the world. These are wholesale, manufacturing, professional, scientific & technical, construction, transport & storage, motor trade, agriculture, health, education, art & entertainment, finance & insurance sectors.
Does Clear Factor have a traditional business model or does all of the value accrue to the native digital asset?
Clear Factor has a traditional business model using modern technologies and protocols and fairer principles. It is building an open, transparent, decentralised and global ecosystem to bring quick and low-cost invoice finance to small and medium businesses (SMEs) struggling for cash flows while taking away the contractual binds, minimum factoring requirements, hidden bank charges, exit barriers, personal guarantees and performance measure covenants imposed by banks.
With a combination of reward-based underwriting, CF-DF score (lending score), the facility to copy successful investment strategies of trade investors, a transparent auction process and an equally transparent auction consensus between the investors and the SME, it will provide investment opportunities to everyone in one of the safest and shortest time-framed investment instruments traditionally open only to banks and large funders.
What is the long-term vision of Clear Factor and how does it intend to achieve success?
Break-even: 1st year post platform deployment
Monthly Growth: Linear growth of 160 new mSMEs every month
$1 Billion Mark: 3rd year post platform deployment; $1+ billion worth of transactions
5th Year Forecast: c.$1.48 billion worth of transactions
Initial Target Market Size: c.0.91 million micro SMEs in the UK with an average turnover of £750,000, an average invoice value of £15,000 and a total of 36 invoices on average per annum and with 1 to 9 employees.
For the purposes of the CF financials we have taken the average value of an invoice to be £4500 (less than 1/3rd of £15,000) to be on the conservative side.
CMGR (Compound Monthly Growth Rate) is not given since we have modelled a linear growth based on what we can definitely achieve in the UK based on the analysis done by a member of our team who was MD at Lloyds Commercials (invoice finance falls within this division) and then was the Global CEO (across 17 countries) at Bibby Financials, the largest non-banking invoice finance organisation in the world.
However, in practice from the 2nd year onwards we would be targeting other Western European countries for onboarding SMEs and that could result in exponential growth.
Current target monthly growth = linearly onboarding 160 new SMEs every month with an average of 36 invoices per year per SME. A lot of these SMEs would initially be approached from the Decimal Factor database of over 670,000 SMEs of which approximately 50% meet our target market criteria after filtering out corner shops and all cash-based businesses.
Please provide a detailed quarterly roadmap with relevant milestones for the next 4-6 quarters.
Ethereum Smart Contracts completed
Stellar Integration completed
All ecosystem user journey mock-ups completed
Alpha MVP (Minimum Viable Platform) completed
UK marketing push
User Testing & Beta MVP completed
EU marketing push
MVP v1.0 launched (i.e. ecosystem goes live) with web and optimised for mobile
UK & EU marketing push continued
Revenue generation begins
Apps for iOS and Android launched
First set of Community Improvement Requests (IR) prioritised
UK, EU & US marketing push
Revenue generation continues
First set of Community IRs implemented
UK, EU, US, South America & Asia marketing push
Revenue generation continues
Please provide a comprehensive description of the token(s), including core use cases.
Clear Factor will operate with a dual token model, deploying both a utility token called FactorToken (FXO) and a price-stable token called Stat that will be pegged 1:1 to a local currency and is entirely internal to the Clear Factor ecosystem.
The price stable Stat will be pegged 1:1 to 5 currencies – there will be a USD Stat pegged to the US dollar, a USDT Stat pegged to the USDT (USD Tether), a GBP Stat pegged to the British pound, an EUR Stat pegged to the Euro and a Yuan Stat pegged to the Chinese Yuan.
The utility tokens, FactorTokens (FXOs), will be available outside the ecosystem and can be acquired either during the Clear Factor token sales or bought via participating cryptocurrency exchanges after the token sales has ended.
All users of the ecosystem, without exception, need to deposit FXOs equivalent to £1 every time they use the Clear Factor ecosystem. FXO is also the means by which all users of the ecosystem receive their rewards.
Once an SME’s invoice is put up for auction, the investors have a choice of interest rate groups to invest in, using Clear Factor ecosystem internal tokens i.e. one of USD, USDT, GBP, EUR or Yuan Stats based on the currency choice of the SME. The investors can make this decision based on their assessment of the CF-DF scores and the underwriter’s ratings or simply choose to follow a Trade Investor of their respective preferences by using the Portfolio Replicate option whereby an investor’s investment amount is distributed across a few invoice auctions mirroring the Trade Investor’s investment choices. The whole auction process is transparent and the filling up of the different interest rate groups is visible to all the participants in an auction.
The interest rate group that fills up the earliest (i.e. reaches the invoice finance amount under auction) constitutes the first formal offer to the SME by the Clear Factor ecosystem. The SME has 3 choices: Accept, Reject or Cancel the Auction.
In the case of SME accepting the offer an immutable ledger entry is committed and the invoice finance amount is transferred to the SME after deducting 1% of the invoice finance amount as ecosystem fee. The investments in the other interest rate groups are transferred back to the investors in full.
If the SME rejects the offer, the investments in the other interest rate groups are returned back to the investors in full and the auction starts again. Likewise, if the SME cancels the auction the investments in the other interest rate groups are returned back to the investors in full.
In all cases if there are no offers to the SME within 24 hours of an auction going live, the auction is cancelled, all investments are refunded in full and the SME has the option of putting the invoice up for auction again.
Tracking Funds Flow through the Invoice Finance Lifecycle
The Clear Factor ecosystem uses its internal token Stat to set the 5 base currencies within the ecosystem as well as to transparently track the flow of funds through the invoice finance lifecycle of an invoice.
The Stat is pegged 1:1 to 5 currencies – a USD Stat pegged to the US dollar, a USDT Stat pegged to the USDT (USD Tether), a GBP Stat pegged to the British pound, an EUR Stat pegged to the Euro and a Yuan Stat pegged to the Chinese Yuan.
The ecosystem then subjects the Stats to Mint-and-Burn mechanism to track the funds flow during the lifecycle of an invoice. Let us look at this in detail.
A UK SME sends an invoice of £115 to a UK Debtor. The invoice has a credit period of 30 days. The UK SME then submits the £115 invoice to the Clear Factor ecosystem and states its preference of wanting the invoice finance amount in GBP.
The ecosystem generates a CF-DF score for the invoice (at this stage the UK Debtor is already in a legally binding assignment agreement with Clear Factor to pay the full value of £115 within the credit period of 30 days) and sets the draw-down limit at £100. The invoice is assigned to a UK underwriter for underwriting since the Debtor is in the UK. The UK underwriter then provides its rating and confirms the draw-down limit as £100.
The invoice is then put up for auction by the ecosystem for an invoice finance amount of £100.
A group of UK investors (or investors with UK bank accounts) transfer £70 to Clear Factor – since it’s a UK bank-to-bank transfer Stellar does not get used – for putting it up in the 2% interest rate group. The Clear Factor ecosystem then mints 70 GBP Stats and puts them in the 2% interest rate group.
Another group of UK investors transfer £100 to Clear Factor to be put up in the 3% interest rate group. The Clear Factor ecosystem then mints 100 GBP Stats and puts them in the 3% interest rate group.
Since the 3% interest rate group fills up first to meet the required invoice finance amount of £100, the auction closes and the offer of £100 at 3% is made to the UK SME. At this stage 170 GBP Stats have been minted. This is the first mint cycle and is always carried out to support the auction process.
The UK SME receives the offer of £100 at 3% and accepts it. At this stage the 70 GBP Stats in the 2% interest group are burned. This is the first burn cycle and is always carried out after the SME has accepted the offer. £70 is refunded to the investors in full.
Now we have 100 GBP Stats left (170 minted thus far, 70 burned). At this stage the invoice finance amount minus the ecosystem fee of 1% of the invoice finance amount (i.e. £99) is transferred to the UK SME. 1 GBP Stat is burned to account for ecosystem fee of £1. This is the second burn cycle and now we have 99 GBP Stats left.
When the UK Debtor pays the full value of the invoice (i.e. £115) to the ecosystem after 30 days, the second mint cycle is triggered and 16 GBP Stats are minted to level up the GBP Stats to the full value of the invoice.
The ecosystem then pays out the principal and interest to the investors (£103) and in the third burn cycle an equivalent amount of GBP Stats is destroyed (103 GBP Stats). The investors when they withdraw their money, they pay 1% of the withdrawal amount as ecosystem fee.
At this stage, we have 12 GBP Stats now. This constitutes the balance owed to the UK SME after deducting the invoice finance amount and the interest on it from the full value of the invoice. £12 is paid out to the UK SME and the remaining 12 GBP Stats are burned in the fourth burn cycle.
Cross Border Invoice Finance
The Clear Factor ecosystem will focus on acquiring SMEs from the UK in the first two years by leveraging its partnership with Decimal Factor and also through its team that has invoice finance experience in the UK and globally. Even so, the individual investors and the trade investors could be from across the world. There would be, therefore, cross border invoice finance scenarios in the ecosystem from the outset.
There are 5 base currencies implemented in the ecosystem using its internal token Stat – USD, USDT, Euro, GBP and Yuan. When investors invest in the ecosystem using currencies other than these 5 base currencies, it creates scenarios where stability is required in terms of currency conversions across a span of time i.e. the period of investment which in turn is equal to the credit period of the invoice under investment.
For example, an investor from Japan investing in Japanese Yen chooses to invest in a GBP invoice. That involves a currency conversion from Japanese Yen to GBP Stat (GBP Stat is always pegged at 1:1 to GBP) while investing and a reverse conversion from GBP Stat to Japanese Yen while receiving back the principal along with the interest. The currency volatility risk in these cases can be carried by the investors or they can choose to use a feature of the ecosystem that carries the risk on behalf of the investors – the Fx Rate Lock-in feature.
Clear Factor Fx Rate Lock-in operates similarly to the concept of a binding contract in the foreign exchange market that locks in the exchange rate for the purchase (or sale) of a currency on a future date provided that the option is mutually acceptable and agreed beforehand.
The mechanism of Clear Factor’s Fx Rate Lock-in is a hedging tool that offers an exchange rate for Fiat currency to Stat conversion and once mutually agreed (between the ecosystem and the SME or the investor as the case may be) that rate is locked in for the duration of the invoice finance lifecycle.
The Clear Factor ecosystem will, by default, provide the collateral requirements for all the Fiat to Stat forward exchange rate offers in the ecosystem. However, these scenarios also present an opportunity for the FXO holders to earn more rewards from the ecosystem.
All FXO holders will have the option to offer FXOs as collateral for the Clear Factor ecosystem’s Fiat to Stat forward exchange rate offer in any given invoice sales to repayment lifecycle. And for this they will be rewarded with 0.25% of the value of the invoice finance amount. This reward, like other rewards in the Clear Factor ecosystem, will be given out in FXOs.
Why are native digital assets necessary for Clear Factor?
a. Provide access-rights and use-rights to the users of the ecosystem
b. Distribute rewards as a consequence of user performance
c. Establish base currencies of the ecosystem for invoice selling and buying
d. Hold transparent and immutable auction consensus process
e. Track the funds flow lifecycle transparently in the ecosystem
Who are the key competitors (crypto and non-crypto) for Clear Factor? How do you plan to differentiate Clear Factor?
The global nature of the Clear Factor ecosystem makes it unique from day one. However, there are other differentiators too. For our initial target market of mSMEs in the UK, we already have access to a large pool of them via our partnership with Decimal Factor. More differentiators are quick access to fair interest rate working capital for the mSMEs via a transparent auction process, a powerful lending score assigned to each invoice that is also independently underwritten by an underwriter local to the country of origin of the Debtor, safe investment instruments for the investors and the different kinds of rewards on offer for the different users.
From a global competition perspective, Barclays has recently led a funding round of $5 million for a US based start-up that appears to offer a solution similar to ours.
Populous is a local UK competitor in the crypto space but at the moment its market focus is not clear. Also, its depth of invoice finance and customer acquisition experience in the UK is not clear. Invox finance is another one from the crypto space – it’s focus is on Australia.
Banks in the UK and most banks across the world are generally not open to the micro SMEs for invoice finance. For example, among the 0.91 million mSMEs in the UK with an average turnover of £750,000 per annum and with 1 – 9 employees, only 14,000 have access to invoice finance from the banks.
In the UK in the professional, construction and the recruitment sectors, there are a handful of finance companies operating today. The rest of the UK SMEs resort to the Alternate Lending space where we know from Decimal Factor that interest rates could be anything between 20% and 120%.