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.
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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