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Success Story – P2P Loan To Manufacturer

This article first appeared Lets Crowd Smarter, a digital publication about crowdfunding and investing in Singapore and Asia.

Not all crowdfunding schemes are fraudulent. We (the Let’s Crowd Smarter Team) have invested in over 50 crowdfunding schemes across different platforms and our overall experience has been great.

Yes, there are a few problem loans whose repayments are always late. And we’re lucky not to have encountered any outright default yet. But we have seen more successes than failures.

We believe that as long as investors stick to the more established crowdfunding platforms (such as Funding Societies, MoolahSense, Capital-Match, Crowdo and New Union) and have a widely diversified portfolio, the overall returns should be positive.

As an example, our p2p loan portfolio is earning a cash return of about 1.5% per month, or about 12% so far this year.

Read Also: Spotting Red Flags in Crowdfunding Schemes

Crowdfunding Success – A Real Story

Here, we’ll share with you a crowdfunding success story – a p2p loan that we participated with Funding Societies in December last year. The effective interest rate was a cool 23.6% per annum. (We also have similar successes with other platforms and will share them next time.)

The loan ID is SB-1512005 but we’ll respect the borrower’s confidentiality and not disclose its identity. Below are some of the key features of the loan.

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To summarize, this company is borrowing $100k as working capital for a $780k project. It promised to repay over 6 months. Effective interest earned by the lender is 23.6% per annum. As this is a 6-month loan, the actual  interest earned is roughly half of that.

Funding Societies provided further financial information and comments on the borrower. We did a quick review and find the risk to be acceptable. Hence, we decided to lend $1,000 on this loan in December last year.

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Prompt Repayment

Over the next 6 months, this borrower repaid promptly every month. The final repayment was in June 2016. On this loan, we earned the 23.6% effective interest rate per annum – exactly as promised.

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Verifying Our Return On Investment

Now let’s verify that we are indeed earning 23.6% effective interest per annum.

But before we do that, we’ll need to explain the difference between effective and simple interest rates.

Effective interest rate refers to the interest earned on the outstanding loan. When the borrower repays its loan every month, the outstanding loan balance declines. The interest earned by this declining loan balance is known as the effective interest.

On the other hand, simple interest is basically the total interest earned by the loan as a percentage of the initial loan amount. It does not take into account the declining loan principal or the repayment every month.

We prefer to use effective interest rate. Using Excel’s IRR function as shown below, we easily show that the effective return is indeed 23.6% per annum.

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Is it really so easy?

If crowdfunding is so easy, why are there still plenty of negative news about defaults and frauds?

In our view, most of these platforms that ran into trouble are poorly managed. Many are fly-by-night operators that nobody has heard of. Their loan underwriting process is not credible at all. For the recent First Asia Alliance case, there were so many red flags, including the fact that the director of the crowdfunding platform is also the shareholder of the investee companies.

But there are also well-managed crowdfunding platforms that already have or in the process of getting CMS licenses from MAS. This includes Funding Societies, Capital Match, MoolahSense, New Union and Crowdo.

We (at Let’s Crowd Smarter) are comfortable with and have invested our own money with this second group of crowdfunding platforms. Overall, our investing experiences have been great. Of course, we do have some problem loans and late repayments, but these usually form less than 10% of our total portfolio. Success stories still far outnumber the failures we had.

If investors choose the correct platforms, investing into crowdfunding schemes can generate attractive returns without too much risk as shown in this example.

Read Also: Traits Of A Successful Trader

Funding Societies is a DollarsAndSense Brand Connect partner. Funding Societies is Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

Default Rates in Peer-to-Peer Lending Platforms

To paraphrase Crowdfund Insider’s “The Ultimate Crowdfunding Guide,” with peer-to-peer (P2P) lending, the risk an investor accepts is default. Every P2P lending platform has its own policy on default, and all investors need to take the time to understand these policies in order to protect themselves.

Because every P2P platform has its own default policy, and because the P2P lending business model is relatively young, we must be cautious when making generalizations about default rates across all platforms. Specific to Funding Societies, we fully aim to keep default rates close to banks – not exceeding 4 to 5% of loan amount to secure healthy returns for investors, even accounting for the cost of default.

The industry’s youth may cause investors with low-risk tolerance to view P2P lending as an unpredictable instrument. Generally, there is a consensus among investors that P2P lending constitutes a higher-risk, but higher-reward investment.

Is this belief true and valid? Let’s take a look at the global trend of default rates in P2P lending platforms.

Default Rates on P2P platforms in the USa

Let’s begin with default rates in USA platforms. In this fascinating article, the author analysed historical trends of default in two well-known USA platforms, then drew conclusions about the default rate of the P2P industry.

(Note that the article was published in 2014, so some might find it dated. However, the analysis within is worth a read)

The writer pointed out that from 2007 to 2008, the USA economy was doing very poorly and that both Lending Club and Prosper were operating under their earliest and most imperfect credit models, which means the default rates of 2007 and 2008 can be waved off. Since 2010, both platforms have averaged a 5% default rate and are likely to continue having solid repayment rates in the future.

The article ends with a positive conclusion about the P2P lending industry. The author wrote: “I see refined underwriting algorithms and mailed borrower marketing, encouraged investor capital and purpose-built technology all repositioning itself over and over for the past eight years until they are arrive at the stable place they hold today. I see analysis and sweat and reanalysis in these charts, and in the end I see it culminating into one of the most simple and creative investments our country has ever seen.”

His statement underscores that under the right circumstances, which includes an innovative team and rigorous credit policies, P2P lending platforms thrive and provide attractive returns while lowering default rates. The key is in selecting a trustworthy platform to invest in.

Read More: 5 Reasons To Invest in Peer-To-Peer Lending

DEFAULT RATES ON P2P PLATFORMS IN THE Uk

Moving on, let’s focus on a well-known and respected P2P lending platform from the UK: Funding Circle. In their statistics page, Funding Circle claims that its average annual default rate stands at 2%. The rate has also remained solid over the years (calculated from 2012-2017), showing that platform maturity and good credit underwriting will stabilise default rates.

funding societies’ DEFAULT RATES

What about our own platform, Funding Societies? Here is our own statistics page. Historically, our default rate across the region has lowered overtime, which reflects the analysis of P2P lending platforms in the USA: continuous platform improvement and rigorous credit policies will lower default rates.

Another worthwhile read about the risks in P2P lending is the study released by the UK Peer-to-Peer Finance Association (P2PFA). Some of the study’s pertinent points include:

  • The P2P industry has created more choice in the financing and investment market.
  • P2P lending platforms conduct credit risk assessment using the financial industry’s best practices.
  • P2P lending does not create systemic risk. Platforms are well-placed to weather a downturn in the credit cycle – defaults would need to increase at least threefold to reduce average interest rates for investors to below zero.

So let’s go back to the question we asked earlier: is P2P lending a higher-risk investment? Not necessarily.

However, the P2PFA study presented two caveats: that there is a good regulatory framework for the P2P industry and that investors are educated. For the first point, MAS has begun setting up regulations for P2P lending platforms. Funding Societies has always been compliant with regulations; we hold the CMS license required by MAS to operate, along with taking due diligence and our credit assessment process very seriously.

For the second point, there will always be risks in investing, including risk of default in P2P financing. But there are ways to mitigate such risks.

Read More: Investing In An Uncertain World

how can i diminish p2p investment risks?

How do you diminish P2P investment risks? You diversify your investment and reinvest your returns.

Diversification means distributing your funds across as many investment opportunities as possible to prevent loss in case of default. The more diversified you are, the more protected your investment. Even defaults hardly disturb your rate of return. If you choose not to diversify, you stand to lose most of your investments should a default occur.

Meanwhile, reinvestment refers to the act of funnelling your investment gains into new investment opportunities to maximise your returns. Without reinvestment, you only receive the expected rate of returns. But with reinvestment, you can maximise (sometimes doubling, even tripling) your returns while minimising your investment risks in case of default.

For more information on diversification and reinvestment, see here.

When investors fully understand the risks of P2P lending and take proper precautions to protect their funds, the advantages of investing in P2P lending clearly outweighs the risks. In fact, it’s very likely that most investors who keep diversifying and reinvesting their investment will continue to earn positive returns.


This is an updated version of an article posted on this blog. Click here for the original article.

This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. They provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. 

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

The Best Advice We’ve Heard about Crowdfunding and P2P Lending

Don’t invest in a person or a company on the basis of its name and fame

The rise of crowdfunding and its offshoots have attracted big names. Celebrity artists like Neil Gaiman and Whoopi Goldberg have utilized crowdfunding campaigns. Businesses more familiar to our ears have tapped into peer-to-peer (P2P) lending. How exciting to invest in their projects!

Careful though! You know the saying: “if something is too good to be true… it usually is.” A famous person or big company can create awe and a false sense of security. We can automatically assume they are more investible. But be cautious, more often than not, crowdfunding and P2P lending are generally utilized by up-and-coming artists, growing startups, and SMEs. Of course, well-known establishments can choose to raise funds from crowdfunding or P2P lending, usually because crowdfunding provides a faster process.

How do we tell if these crowdfunding opportunities are the real deal? Treat famous names like any other investment. Objectively and don’t forget thorough due diligence. Ask the important questions: does this well-known figure have financial problems? How is this company doing according to its financial statements? Growing? Healthy? Well-run and profitable?

Do your research

Related to advice number 1, avoid fraud by asking for fact sheets (borrower background summary) and reviewing them. A crowdfunding or P2P lending platform should have performed their own assessment, but protect your funds by doing your homework and going through the assessment.

You are allowed to ask for the crowdfunded entity’s financial details if you are investing in it. In fact, be wary if you can’t access financial information easily.

It’s crucial to learn how to read financial documents. Learn which accounting elements show business health. Learn which accounting elements display promising business growth.

Read More: Is Your P2P Platform’s Interests Aligned With Yours?

Do diversify your loans

Our third advice relates more to P2P lending investors than crowdfunding donors. Crowdfunding backers tend to donate funds out of altruism or for intangible rewards. However, if you are crowdfunding as an alternative investment, diversifying your loans is a must do!

What is diversification? It simply means distributing your money across as many loans as possible to prevent loss in case of default.

No matter how thorough the due diligence, risk is an inevitable element of any investment. Diversification is the answer for such risks. For example, if you pour SGD 1000 in only one company and it defaults, your returns will drastically drop. You’ll probably lose money. Yet when you spread your funds to ten, twenty, even fifty businesses, your returns will remain positive and will stay close to the expected rate of return.

It’s important to repeat: diversification keeps your rate of return steady, even in the case of defaults.

Read More: Investing In An Uncertain World

Do reinvest your returns

Our final advice also pertains more for investors building a portfolio. If you want to maximize your venture into P2P lending, you need to start reinvesting.

What we mean by reinvesting is using your gains to fund other businesses. Reinvesting multiplies your returns. The compounding effect of such reinvestment can be very strong!

Without reinvestment, you simply receive gains according to a loan’s expected rate of return. Here’s an example: You invest SGD 1000 in a business that offers an annual 20% rate of return. The business succeeds. You earn returns of SGD 200 in a year.

Let’s see what happens when you reinvest. You invest SGD 1000 in a similar business that offers a 20% rate of return. After month 1, you earn a return of SGD 16.70 (from annual gain of SGD 200 divided by 12 months). Immediately, at the start of month 2, you reinvest the money into a similar loan. At the start of month 3, you reinvest your earnings from month 2 into yet another loan. And so it goes until the end of the year, when it is very likely you have doubled your investment instead of only gaining a profit of 20%.

Reinvestment requires minimum effort and is a great form of passive income. All the more reason it is a definite do!

Should you be interested in learning more about the many benefits of investing in P2P financing, click here.

This article was first posted on the blog of Funding Societies (Singapore). Click here for the original article.

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

6 Different Types Of Alternative Investments You Should Consider

Whether you’re just looking, or starting out in investing, it will be helpful to understand the major instruments with which people tend to invest. This video gives an overview of 6 main investment options, as well as their qualities and characteristics. 

Read More: Starter’s Guide: 6 Different Types of Investments For You To Consider

Read Also: This App Can Help You Kick Start Your Investment Journey

Find out more about alternative investing at Funding Societies here.

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

 

8 Things to Ask Yourself Before Applying for a Business Loan

These days, there are several resources available for business loans. But while the options exist, receiving funding is never easy – especially if you are part of a small business. Then there’s the evaluation bit. Lenders review your application thoroughly before they can deem you worthy and disburse the necessary funds. (For more information on the loan evaluation process, see this article).

Obviously, you want to maximize your chances of loan approval. Ask yourself these question before you prepare your loan application:

  1. Why do I need a business loan?

Every business loan consideration should start with this question. Do you really need a business loan? Of course, there are many excellent reasons why a business loan would be beneficial: you are planning an expansion and need financing to make it happen, you need to purchase equipment to improve your product, you need to purchase more inventory from your supplier, or you just need an injection of working capital.

Feeling unsure if your “why” passes the test? Here’s a good rule of thumb: ask yourself if a business loan will make your business grow. If the answer is yes, go for it. If not, you may want to evaluate some of your priorities.

Remember: whatever your reason for a business loan application, your lenders will question you about it. Be sure you can explain your reasoning eloquently.

  1. How much money do I need?

Like question number 1, lenders will ask loan applicants this question. Do ensure that you have spent enough time making proper calculations. If you are buying equipment, research the cost. Create financial projections.

Asking for too little will create working capital problems and might make your company financials suffer. Asking for too much makes you look as if you haven’t done the necessary research. Worse, lenders may think you lack credibility.

  1. How are my financials?

Obviously, your lenders will want to know if you can repay your loans. Otherwise why would they bother? So make sure you have a healthy cash flow and solid financial figures.

It’s very likely that you will be asked for your company’s balance sheets, income statements, cash flow statements, and bank statements so your lenders can analyze your situation.

Take the time to create accurate projections. Try to create a debt repayment plan as well.

  1. Do I have other debts?

Related to number 3, lenders will want to know all about your credit history. They want to ensure that you can repay your loan, and if you have other unmet obligations hanging over your head, lenders will view your other debts as a danger sign.

  1. Which lender is most appropriate for my credit needs?

Take the time to choose a lender that suits your needs. Research various loan products and structure, take a look at loan interest, etc. There are different lending institutions for different needs, such as large and small banks, financial institutions, government-backed loan packages, and alternative lenders, such as crowdfunding.

To read more about finding business financing for small businesses in Singapore, click here.

  1. Do I meet my chosen lender’s requirements?

Business loan applications goes both ways. While you need to choose the most suitable lender for you, it is crucial that you meet their requirements. Otherwise, sending a loan application would be a waste of time. And it can hurt you, because the next lender you apply to might question why you were rejected for other business loans.

  1. What’s my business plan?

Lenders will ask for your business plan. They want to know details on how you will use the loan money, what your plans for the future are, and whether you will ultimately repay your obligations.

A strong business plan should include past and current financial statements, along with future projections. Other elements you may want to consider are: company and product description, market analysis, and company strategy for growth.

  1. Do I have all my documents in order?

If you have all your documentation ready, the application process will be much smoother. You will also look prepared to your lender.

While required documents vary across different lending institutions, every lender will ask for financial statements. In addition, you may be asked for your credit report (personal and/or business), tax returns, bank statements, collateral information (depending on loan type), and legal documents (business licenses and registrations, articles of incorporation, etc)

Ultimately, applying for a business loan is all about preparation. Good luck!