The managing director of peer-to-peer invoice funder, The Invoice Market, has warned of a growing trend in the debtor financing market resulting in risky credit underwriting.
According to Angus Sedgwick, there is ‘worrying’ market talk that some local participants are following trends seen in the UK and US markets, whereby diligent credit underwriting is being replaced by algorithms.
Whilst this may help service a higher volume of transactions, Sedgwick said it also results in higher than expected loss ratios.
“Typically, if funders are experiencing higher than expected loss ratios it may be a reflection of a heavy reliance on algorithmic credit underwriting processes.
“They may allow for higher volume of transactions but typically are not intuitive or robust enough to accurately assess the quality of transactions in the SME space, particularly where the business is a start-up.
“In contrast, by ‘adding back’ an element of human assessment to both the credit assessment and invoice verification, tim has maintained a loss ratio of less than 0.4% of the total book over the past two years. At the same time, we have been able to offer very competitive funding rates to our clients.”
However, as debtor funding becomes more widespread, Sedgwick said the industry has also seen many positive changes.
“Undoubtedly, the main positive for businesses is that they are no longer restricted to on balance sheet funding, which many do not want or are unable to get.
“We can attribute tim’s growth in funding levels to three key areas – an increased awareness by businesses; our work with traditional funders to set up joint referral processes that ultimately enhance client experience; and acting as an incubator for clients currently falling outside normal banking criteria.”