Why Centrifuge will be huge (from an ex banker)

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The invoice financing / factoring global market is expected to be $10 Trillion by 2025.

I know it is only a subset of the real world assets that can be brought in a tokenised format into Tinlake/Centrifuge however this is one of the biggest unorganised markets.

What is invoice financing? Basically businesses, usually SMEs, sell their accounts receivable (ie invoices) to a third party for a percentage of their value. So, instead of receiving 100 in 90 days from its client, the SME receives 95 today from capital markets and the financing parties receive the 100 in 3 months from its client.

The SME has immediate working capital, and the financing parties get a healthy interest (approx 20% annualised in the example).

What are the problems in invoice financing in the traditional world that I noticed when working on projects in this space (I was within capital markets of a major investment bank)?

  1. Financing parties / Centralisation: This is a centralised world where the structuring and placement is handled by banks, and they place these instruments with asset managers or treasuries of other banks. Therefore, SMEs are subject to the fees and whims of these parties.
  2. Access: Most SMEs don’t have access to the described parties. They are invariable too small to matter to the banks. Of course banks have limited time and resources and they would like to maximise their output but that leaves a lot of SMEs without access.
  3. Ratings: Most banks will need the SME to get a credit rating on the notes backed by invoices, as unrated notes are not acceptable to their clients. A rating process requires furnishing a lot of historical data and is an expensive/time consuming process that most SMEs cannot afford.

Crowd-funding has been used for invoice financing however crowd funding has seen greater success with equity financings, and the central authority vets the projects before including them on the platform, thereby preventing access to scores of SMEs.

Enter Centrifuge and Tinlake.

While crypto is still fairly nascent, the success of lending and borrowing platforms such as Aave, Compound, Yearn etc has shown that DeFi has a great future. The ability to lend and borrow without centralised entities and without burdensome regulations and bureaucracy has created a great value proposition.

There is no reason why that success cannot be translated into the invoice financing and other related financings at scale, especially considering the shortcomings described above. How dos Centrifuge solve such issues?

  1. Financing parties: SMEs are no longer at the whims of the banks, and can just clear themselves on the platform (KYC etc) and be ready to borrow.
  2. Access: Any SME can access the Centrifuge platform
  3. Ratings: No ratings needed and therefore no time/cost concerns.

Sky is the limit. Or, in this case, $10 Tn TAM.

Super excited for Centrifuge/Tinlake/RAD.

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Thanks for your post, I was curious how big this market might be.
Do you mind sharing the source for this figure?

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This was a great read. Always nice to get someone else’s view on the market. Im Excited for Centrifuge/ Tinlake and Rad as well.

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Sure. There are multiple references but you can check this one:

https://www.globenewswire.com/news-release/2019/04/22/1807305/0/en/Factoring-Market-will-grow-at-a-CAGR-of-14-6-to-reach-9-275-15-Billion-by-2025-Global-Analysis-by-Trends-Size-Share-Opportunities-and-Challenges-Adroit-Market-Research.html

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So question is who of all these DeFi tokens will have the biggest pool of money to land. Hopefully Centrifuge will be on biggest that will cover the SMEs. As a ex-banker where do you see our advantage?

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That is a great question and one that is not easy to answer.

While we have the incumbents like Aave/Comp where borrowing happens without any KYC/regulation, Centrifuge/Tinlake go through a lot of regulatory rigour to ensure that the debtors are credible.

My personal view is that consumer finance in the decentralised world will move toward the Aaves of this space, while SME/Corp finance will move more towards Tinlake/Maple etc where there is more regulatory rigour.

In addition, Tinlake requires a minimum of $10k as investment whereas there is no minimum limit for Aave/Comp, which also adds credence to the consumer finance / SME finance belief I have.

One thing is for sure - like how we have many banks out there we will also have multiple DeFi protocols/tokens that will be successful in the long run. The market is just way too big…

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Thank you! In all of this time I was searching a non 100% technical explanation to understand better the project. Now I’m more bullish on RAD.

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The thing I like about Centrifuge is that it also caters to small businesses as well not only from one category but many and so long as the business is legit…the company is real…then it’s gonna be easy for the representative from the Centrifuge side to assess the risk that’s attached to it especially when approving the finance raised for the needed companies through its invoicing financing system because we all know…how hard it is sometimes for small SMEs trying to raise money from banks.Not to mention the cost of raising money is also quite prohibitive especially with the kind of profit margin that these small businesses have.It’s kinda like a ’ life-saviour ’ option for these small businesses and that’s why I honestly believe Centrifuge’s gonna hit a home-run with their business model.When and how big’s gonna be? Only time will tell.

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True. However the min investment to lend is $10k so this will not be a very retail friendly product, for now.

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thank you! well explain

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Thats awesome that small businesses can benefit from centrifuge. A life saver is needed.

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Great post. Thanks for sharing.

I’ve worked with SMEs in finance and operations for several years, and certainly see the niche here that Centrifuge will be filling. Coupled with the current global economic climate it is only a matter of time. If you build something great they will come. A business needs liquidity/working capital.

Would be great if there were some sort of Rad incentive for bringing SMEs to Centrifuge lakes.

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Thanks for your valuable information. Also the questions of the participants are interesting.
I know companies that could be interested in such a kind of solution. If I want to propose a company such a solution for invoice financing / factoring, what kind of license do I need? A banking license? Or one as financial adviser?

I am also excited to see what Centrifuge/Tinlake/RAD is contributing. Disruptive and fascinating.

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It depends on the company, its jurisdiction, and its regulator.

You can check with the teams who have already listed on the platform. They are pretty responsive.

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This is what we want to hear! :heart_eyes: :heart_eyes: :bomb: :rocket:

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3 years ago when I first heard about factoring is brought to crypto world I was very excited and invested in the project(PPT) but unfortunately it has been a total disappointment. I would like to hear why do you think the fate of Centrifuge is going to be any different than PPT in factoring side of the project.

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Hi - thanks for your email.

There are a few things I would like to point out - from my limited knowledge on PPT having only followed that project peripherally:

  • Centrifuge has already managed to develop steady and increasing TVL in the Tinlake program, currently over $20M. I dont think PPT has more than $1M
  • While PPT focuses just on invoices, Centrifuge will cater to most real world assets. Tinlake itself has invoices, receivables, inventory etc.
  • There were question marks about the PPT founder - I dont want to dwell too much into this as I dont know him personally - but this may have had an impact in low adoption
  • The financing world is huuuge, but there will be a lot of challenges, primarily regulations. I think Centrifuge is going about this the right way in having all the bells and whistles in place to ensure smooth scaling. Minimum ticket sizes are also quite high for retail investors so that will impede large scale adoption as well, for now.

I have been following these guys for over 2y and have the conviction in them. I hope to be proven right, but obv DYOR as well. I am a lender in one of the pools and it was a smooth process allowing me to do my DD, and I am now accruing CFG rewards as well.

There are some other competitors in this space as well, such as Persistence.

Cheers

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and these are the type of integrations that are being worked on…