The Economics of Delayed Payments

  1. CROWDESTOR allows investors from all over Europe to invest in Business loans and other ambitious projects. The projects yield above the average interest rate, and it is appealing to many investors. However, it is important to bear in mind that the above the market interest rate is the compensation for elevated risks and unforeseen situations that accompany such projects. The delayed payments are one of them. Read this article and learn why there are delayed payments and why this could be normal!  

    The recent event organized by the House of Fintech and supported by CROWDESTOR, Crassula, Venture Faculty, has had a fascinating and relevant discussion titled “Funding for FinTech, who will support the economic growth." The panel discussion included industry leaders who represented the different attitudes towards risk, from one of the oldest banks in Latvia Signet, with a conservative view on asset management. On the other side of the risk-tolerance spectrum were Venture Capital Firms -iTech Capital, Seedrs, and Startup Wise Guys; The startup view represented the renowned Baltic startup Nordigen. Entrepreneurs in the FinTech sector had a chance to participate in the panel discussion. There were excellent questions raised, about the risks of crowdfunding platforms. The established Venture Capital professionals have emphasized a significant point: the crowdfunding bears a risk, but the investors often overlook this fact or are not even aware.

    Venture Capital & Crowdfunding

    The Venture Capital (VC) firms were previously allowed to participate in the startup investing, contributing very large sums. Ordinary people who wanted to invest in such opportunities were not able to do so, due to the large entry ticket and stricter KYC requirements. Only high net worth individuals with solid previous investment experience were able to afford it. The crowdfunding has revolutionized the startup and business investing, and open access to the masses. Now, almost everyone has access to invest in startups, but it comes with costs too. The experienced VC firms know that the Pareto principle is applicable to investments in startups (20% of all investments are making 80% of all profits) plus the startups have a very large failure rate.

    CROWDESTOR is not as aggressive in choosing the investment targets, firstly, because we understand that we are dealing with investors with lower risk tolerance. And secondly, because we are a debt-based crowdfunding platform, therefore the unlimited upside compensating all risks (like with equity crowdfunding) is not present. Thirdly, CROWDESTOR is very public and projects that are failing very often would have negative feedback from customers.

    Risk of Delayed Payment

    Nonetheless, there are risks that are very likely when investing in business crowdfunding campaigns. The delay in receiving the interest or principal payments is one of them. Moreover, the absence of delayed payments is a red flag. The small and medium enterprises (SMEs) and large complex projects very often encounter missed payments form their subcontractors, customers, and many other parties involved in the supply chain. This is normal and happens everywhere. So, if the platform never delays a payment it raises a question, whether the payment is paid at the expense of another project, their own funds, or worse- customer’s funds.

    Facts About SME Payments

    According to a study of SV Legal 43% of SMEs experienced late payments during 2018 and it is estimated that £13 billion is suffered in late payments by SMEs in total.1

    Since CROWDESTOR works only with businesses, the platform together with our investors is becoming part of the supply chain, which is quite long and involves many players.

    Small and Medium Enterprises are especially vulnerable to the effect of late payments made by their own customers because their cash flows are tight. For a big firm or a corporation, late payment is not felt the same way, as they have enough cash and provision funds to accommodate the missed incoming payments.

    The Payments Study by Dan & Breadstreet has found out that only 53.8% of all companies in the US pay their bills on time, whereas in the EU this number is even lower- only 39.1% of payments were punctual.2

    Interestingly, the study by Hilton-Baird Collection Services in the UK has found out that businesses with turnover less than £500,000 had an average delay of 25.2 days, whereas companies with turnover over £3 Mln, had an average delay period of 19.2 days. As a result, 48% of studied firms were forced to pay their suppliers later.3

    The situation is even more dramatic with manufacturing SMEs- which wait twice as long for invoices to be paid than the large manufacturing firms. The reason for that is that the larger firms have a bigger customer relations department, or debt collection agencies working for them. Additionally, the reputation of the large firms might offer more motivation for their customers to pay them on time.

    Once Again on COVID-19

    The numbers gathered from different countries on the payments statistics of SMEs are already disturbing. The numbers probably have been even more worrying after the COVID-19 induced crisis has started. The pandemic might be overused in blaming the worsening of the business climate; however, it is to blame. Due to uncertainty that has damaged many SMEs’ daily operations- from stopping construction workers to come to work, to bankrupting the subcontractors and many other changes of plans. SMEs have faced many challenges, which of course have negatively affected their repayment capabilities of any borrowed funds.

    Next Steps

    CROWDESTOR understands that the delayed payments might concern some clients, and we fully on the side of the investors in this case. The above statistics and arguments are not an excuse, and it doesn’t mean we are satisfied with the outcome. It is simply the explanation of the other side of the coin.

    CROWDESTOR is working together with the management of the affected projects, to work out the plan to recover missed payments as soon as possible. The crisis that the whole world has encountered is completely new, and there are no tested tactics or plan of action, so everyone has to “think on their feet” right now.

    We are considering the following solutions:

    1. To apply the grace period without fees if we see that the Borrower will be able to repay the loan within a month or two.
    2. To allow to publish additional fundraising campaign with the aim to allow the Borrower to recover faster.
    3. Impose a penalty fee for the period of delay which is then being shared with the investors.
    4. To allow to repay the loan partly and to apply one of the above-mentioned provisions for the remaining part of the payment.
    5. To file bankruptcy against a borrower if there is a lack of communication and other signs of the absence of willingness to solve problems and pay. However, this is the last resort option, as default is not the magic pill. Take, for example, the Grocery Store project: if we have defaulted the project right away when the first delayed payment occurred, we would have bear a 67% loss, selling the assets below its value. We always search for solutions that will satisfy the interests of our investors in the best way. 

    The investors’ interests no matter how much they have invested in the priority for CROWDESTOR and we are working case-by-case with each borrower to find the ultimate solutions that will benefit all parties. In the meantime, we want to highlight that not all borrowers have encountered problems paying their obligations and there are projects with no delays. We encourage all our investors to plan their financial future responsibly and weight the risk/reward ratios that are acceptable for them.