An Investor’s Guide to Facility Types
In our previous article Building a Diversified Portfolio on Validus Platform, we discussed the importance of portfolio diversification and three ways to diversify into SME lending via Validus. Here, we break down the various types of products you can add to your portfolio.
1-Invoice Financing AR
This is a short-term option where the borrower (SME) obtains financing for working capital usage, using their Accounts Receivables (AR) / unpaid invoice(s), which Validus will lend against. Repayment is expected when the end-buyer (for whom the SME has been contracted to perform and has completed work) makes payment. Depending on the invoice terms, the loan tenure will range from 30 days to 150 days.
Investors will receive interest (accrued daily) up to the date of repayment.
Good to know: This facility carries lower risk since work has already been delivered and the borrower (SME) has a reasonable expectation of being paid.
To further protect our investors, we have implemented in-built repayment ring-fencing mechanisms in the following ways:
- Invoice Financing AR (Disclosed)
A ‘Notice to Redirect Payment’ will be sent to the end-buyer (for whom the SME has been contracted to perform work), and payment will be made directly to Validus (under an escrow account managed by a third-party escrow agent for safeguarding and segregation of investor funds) according to the terms of the invoice
- Invoice Financing AR (Non-disclosed)
The borrower (SME) will inform the end-buyer to make payment to a sweeping account in their name but managed by Validus (again, under an escrow account managed by a third-party escrow agent).
2-Purchase Order Financing
Designed for growing businesses preparing to fulfill large orders or contracts, this is a short-term financing option that unlocks working capital for SMEs at the pre-project delivery phase based on a verified purchase order. Repayment is expected when the job or project is completed.
Good to know: This facility type is typically approved for existing contracts and is often converted into an Invoice Financing facility upon completion of the work.
3-Working Capital Financing
Targeted at borrowers (SMEs) who may require additional funds for their short-term operational needs without necessarily having a large linked project, this facility typically provides SMEs with working capital for a three to twelve months’ tenure.
Good to know: Repayments are expected in equal installments monthly for the loan term, allowing investors to receive monthly interest payments and monitor the SMEs’ capability to fulfill their payment obligations.
About Validus Corporate Vendor Financing (CVF) program
Partnerships are the cornerstone of Validus’ origination strategy. Under the Corporate Vendor Financing program, we partner with Corporates, including government-linked entities, multinational corporations, and blue-chip companies, to support the cash-flow needs of their supply chains, where we unlock working capital and strengthen the supply chain by ensuring that their vendors have adequate capital to deliver projects and orders.
Corporate Vendor Financing (referred to as CVF) is an Invoice Financing product offered to our partners’ SME vendors, where we extend pre-approved financing at preferential rates to SMEs from our partner’s vendor base.
How it works: Borrowers (SME Vendor) submit their verified invoices to Validus, and upon approval, we will disburse up to 80% of the invoice amount to the borrower. Once our partner makes payment based on the invoice’s terms, we will send the borrower the balance amount, minus interest payable. Payment is ring-fenced as our CVF Partner makes payment directly to Validus (under an escrow account structure and managed by a third-party escrow agent).
Good to know: These facilities are often insured. Investors may check each facility or contact their dedicated relationship managers (RMs) for more information.
More opportunities under the Corporate Vendor Financing model
We also offer Purchase Order and Working Capital Financing solutions to SMEs that originated through this channel. These products are offered to existing borrowers (SME vendor base) under the CVF Program, based on their track record and performance data, offering an additional ring-fenced mechanism and assurance to our investors. Because we receive payments from our Partners on the amounts financed, we have ringfencing mechanisms even while we are financing Purchase Orders and Working Capital Loans to this subset of borrowers.
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