Saturday, 2024 April 13

Polytrade taps crypto liquidity to provide invoice financing

Cash flow has been topping the list of concerns for many micro, small, and medium enterprises in Southeast Asia during the pandemic. For instance, over 85% of MSMEs in Indonesia said to not have enough cash to continue operations in the face of a month-long loss of cash inflows, according to a survey conducted between March and May last year by the Asian Development Bank (ADB).

The cashflow headache symphonizes with a global trade financing gap that grew to a record high of USD 1.7 trillion in 2020, up 15% from 2018, led by rising economic and financial uncertainties created by the pandemic. In particular, women-owned SMEs reported a 70% financing rejection rate, another ADB study found.

Piyush Gupta, the founder of blockchain-based trade finance firm Polytrade, a division of Hong Kong-based Riqueza Capital Group, has witnessed the difficulties of borrowers first-hand. In 2014, he launched trading finance consulting firm Riqueza Capital Group to provide invoice financing to MSMEs in the region.

“In the first couple of years of running the business, I was so surprised to see many brilliant companies that were not able to get enough working capital from banks or local trade finance companies, simply because of the lack of exposure,” Gupta said. Some of Riqueza Capital Group’s clients provide services or products to multinational brands such as Walmart, Ikea, and Nike, he said.

Business-to-business transactions usually take up to 43 days to settle, according to a report by trade credit insurer Atradius. Invoice financing allows suppliers and manufacturers to borrow money against unpaid invoices through a third-party lender like a bank or a financial institution. This shortens their working capital cycle and improves cash flow.

“For MSMEs, the only collateral available in trade financing is their invoice or the receivables. Because it proves that the company has sold the goods and is awaiting payments from its suppliers or clients,” Gupta explained. As of 2020, Riqueza Capital Group has amassed a base of 5,000 borrowers who have funded over 250 firms with a cumulative capital of USD 500 million.

Gupta, however, is taking his business forward by leveraging blockchain technology. In the first semester of this year, he launched Polytrade, a financing platform that seeks to facilitate invoice financing by connecting companies with crypto investors on the blockchain. “The whole concept of decentralization is that anybody who seeks finance can come on board and anybody who wants to finance can also take part in it,” Gupta said.

While an array of DeFi lending platforms have arisen in recent years, including Aave, Compound, and Uniswap, there are only a few players in the invoice financing segment, among them Australia-based Invox Finance, and Dubai-based InvoiceMate. Polytrade looks to be a major competitor in this space.

The platform raised USD 1.2 million in May from investors, including Sandeep Nailwal, co-founder and CEO of Polygon, Master Ventures, and Orion Protocol. The platform is currently preparing to launch partial services by mid-December officially.

Southeast Asia will be a primary target for Polytrade, according to Gupta. He said to be in talks with a “notable trade financing firm” in Indonesia for a potential partnership. At the same time, he also mentioned his intention to leverage the existing network of customers and investors of Riqueza Capital Group to join the platform.

The firm is also targeting the Latin American market. In October, Polytrade inked a partnership with Miami-based trade finance lending startup Marco Financial to provide credit lines to deploy in Latin America.

Piyush Gupta, founder and CEO of Polytrade. Photo courtesy of Polytrade.

How Polytrade works?

Polytrade enables investors to gain interest over their capital deposited on the Polytrade platform via stablecoins such as Tether and USD coins, and through the company’s Trade token. On the other side, Borrowers can quickly have access to capital by selling their invoices at a discounted price on the platform.

The platform is structured into three portals. The first portal will enable lenders to invest their crypto assets. The Polytrade platform aggregates funds from investors into a combined liquidity pool to dispense loans. The annual yield on stablecoins will be 5% to 6%, while the firm will pay a 10% interest rate on deposits made via Trade tokens, according to Gupta. The investment portal is set to launch by mid-December of this year.

A second portal, expected to go live before January 10, will allow MSMEs to apply for loans by submitting their invoices and know your customer supporting documents. Loans will be dispensed in dollars and wired to the borrowers, Gupta said. Polytrade’s entity in Singapore will act as an intermediary to convert tokens from the lending pool into dollars. “The crypto liquidity will eventually be lent into the real world, as the crypto is converted to fiat money for borrowers,” Gupta said.

Buyers of services and goods from MSMEs can use a third portal to pay their invoices to Polytrade in fiat currency, Gupta added. Polytrade’s main stream of revenue will be generated from a net interest margin over the financed invoice, Gupta added.

The platform has been operating in beta mode since October 19, although Gupta did not disclose any number about the initial user reaction.

Security as first priority 

Although DeFi platforms like Polytrade could help open up financing access for individuals and MSMEs, they could also be subject to hacks and data breaches. For instance, Poly Network, a DeFi platform that allows users to move tokens across blockchains, suffered a historic breach that drained USD 613 million from its coffers in August, although the hacker later returned nearly all the stolen assets, according to the firm.

Recent notable hacks also involved liquidity protocol Visor Finance, which lost USD 975,720 on November 28. Lending protocol Cream Finance, which lost USD 130 million worth of assets on October 27, and AutoShark Finance, which suffered over USD 2 million in losses on October 29, according to data from blockchain security firm SlowMist.

Gupta said that security is of “ultimate importance” to the firm. “We have seen so many hacks recently. Hackers are smarter than companies because they have much more time and tools to play around.” He revealed that the firm is set to start a bug bounty program with cash rewards to invite ethical hackers to test the platform to discover and report any vulnerability or bug.

“We are hiring the best security audit companies to make sure that the contracts are watertight and there is no room to come in,” Gupta said.

He remains confident about the invoice financing industry and its future development on the blockchain. Polytrade has also recently launched an invoice management product named Polytrade Meta, which aims to assist companies in processing enterprise invoices and payments in the metaverse. Gupta did not reveal significant details about this new platform, but said that blockchain scalability platform Polygon would be the company’s first client.

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