Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Friday, 17 June 2016

Debt Crowdfunding 101 in Singapore

There are 4 general kinds of crowdfunding in the world. They are namely donations, pledge (or reward), equity and debt. We will be focusing on the more prominently seen method used in Singapore: Debt!
It was reported on Straits Times February 2016 that MoolahSense has helped 22 companies raised a total of $5 million since it was launched in 2014.

What is it?
In debt funding (aka peer-to-peer lending), fund providers are basically taking over the job as a bank; lending money to firms that need them (fund raisers) and in return, gets interest payment. Fund raisers also get what they want (access to money to support their business).
This has been the case for many years – friends and family supporting the business of someone they know. But today, with the help of internet, the help and support from “family and friends” have expanded to a lot more people, including friends you have not met!
You may be curious as to why are the banks not helping these companies. The reason is because most of the companies that seek crowdfunding are usually small and medium enterprises (SMEs). They are considered to be of higher risks for the banks than big enterprises (think ShengSiong versus your neighbourhood mama shop).
Another reason is because of the costs and returns achieved from lending these SMEs money. SMEs usually requires not much funds (usually less than $1 million). The banks have compliance cost, legal cost, operating cost and interest cost (just to list a few, there are more costs) to cover when giving loans. If the loan amount is not big, the returns that banks get from SMEs are insufficient to cover these costs. Thus banks are unwilling to lend money to small borrowers.

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How Does It Work?
For Fund Raisers
  • You submit a request to the platform you are seeking to raise funds
  • You will submit your company’s information, amount you wish to raise, time period of the loan and the interest you are willing to pay (there are also instances where the interest rate is determined by fund providers instead of fund raisers). Rates are also usually set at mid to high teens
  • Upon confirming the credit-worthiness of your company by the crowdfunding platform, your campaign will be published on the platform for fund providers to view and fund
  • Once the campaign closes, you will receive your funds (less the commission of the platform)
  • When the interest payment dates and/or principal payment dates are near, firms will be notified to do the paying to the platform, who will then redistribute them to the fund providers

For Fund Providers
  • The crowdfunding platform will publish the campaigns of companies seeking loans
  • You decide which companies you wish to lend your money to and then you fund them
  • The crowdfunding platform will review the companies’ results and send to you the interest and principal payments when they are due

Benefits of Debt Crowdfunding?
For Fund Raisers
  • Faster process, approval and loan disbursement than banks
  • Lower interest rates (though not always)
  • Get loans that banks are unwilling to provide
  • Credibility aids in getting the loans from public, especially if you had raised funds previously and made prompt payments
  • Publicity boost as company will be ‘featured’ and campaigns will be shared on social media. This aids in bringing in more people to participate in the campaign or increase its customer base

For Fund Providers
  • Higher interest than what banks are providing
  • Funding is as easy as wiring money to a bank
  • You get to choose who you lend your money to (an environment-friendly company or pet home)

Risks of Funding a Debt Crowdfunding?
Bankruptcy of Company
In the event that the fund raiser goes bankrupt, you might not get your money back. However, if the company’s assets are sold, because you are still considered as a debtor, you can claim the sale value of the assets that are sold, hence you may be able to reclaim some or all of your money back.

Missed Interest Payments
Companies might miss their interest payments to you for many reasons ranging from not remembering to wire them to the crowdfunding platform or the companies run out of cash.

Secured or Unsecured Loans
There are some instances where the fund raiser companies decide to put some assets (properties or equipment etc) as collateral to let fund providers feel that the loans are safer, these are called secured loans. In the event of a default by the companies, fund providers may seize these assets, sell them and reclaim back the money they loan to the companies.

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1 comment:

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