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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.

4 Things About Your Personal Finance To Handle Before Thinking Of Starting Your Own Business

Prime Minister Lee Hsien Loong made a trip down to Silicon Valley earlier this month to visit some of the top start-ups in recent years. During his trip, he met some of the top entrepreneurs in the world over including Facebook’s Mark Zuckerberg and Tesla & Space X CEO Elon Musk.

Starting your own business is not easy, especially if you are not born with a silver spoon. Aside from needing a top notch idea, a great team for execution, the perfect timing, the right investors and a nice dose of luck, you also need to get your own personal finance in order…first. Failure to do so would cause unnecessary stress to an already stressful career.

Before you think of taking the plunge to be your own boss, here are some personal finance matters that you should consider first.

Read Also: 5 Signs You Are Ready To Change Your Job

1. Can You Embrace A Simple Lifestyle?

When you run your own business, a large part of the effort you put in is to grow the business for tomorrow. Start-ups or new businesses do NOT work for today. They work for tomorrow, while balancing today’s need.

When you hustle, you hustle for tomorrow.

This has two main implications.

The first implication is that if (and that’s a big “if”) the business succeeds, you get to enjoy the long-term value that it brings to you, its shareholders. That could be in the form of passive income to shareholders or a big exit through an eventual sale of the business.

The second implication is that you are not going to be paid well (if any) for running this business of yours today. And that “today” can easily last 4 to 5 years.

Forget about flashing your CEO namecard at clubs or buying expensive bottle of drinks for your entourage, you wouldn’t be able to afford it. Those restaurant meals that your friends are enjoying may also be out of the question.

Rather, homecooked dinners followed by cheap coffee are likely to be the norm. So would squeezing onto the train to get to work each morning.

Billionaire Elon Musk once lived on about $1 per day in his college days. The reason for him doing so was to test himself if he really had what it takes to be an entrepreneur, and be able to survive under extreme circumstances. Elon Musk rational was that if he could survive on $30 per month on food, then it shouldn’t be too difficult for him to earn and survive on that amount as an entrepreneur.

He could. Can you?

2. Are You Able To Endure Being Underpaid?

Businesses take time to grow. If you are creating a start-up (i.e a business that nobody has done successfully), you will need even more time to grow it.

People who work regular jobs expect to be paid salaries that commiserate with their average output. When we are worth $3,000 per month as a fresh graduate, we expect to be paid that amount. When our skills and experiences increase, we expect to be paid more.

When you are working on your own business, this logic needs to be thrown out of the window. Even if you are the super employee/boss of the company doing everything from closing business deals, delivering great products and services to your clients and being a one-man accounting team, you might still be paid $2,000 per month – for doing a great job.

You might be working harder and smarter than all of your peers and still be earning the least amount of money among everyone whom you know, at least for the first few years.

Can you handle that?

3. Can Your Family Cope Financially With Your Decision?

Most of us have financial commitments in life. Some of these commitments are long-term, such as paying for the home mortgage and taking care of the needs of our children and elderly parents.

Like it or not, financial commitment to our family is one thing that we cannot get ourselves out from. You might be able to live a simple life, but your family would need to be able to cope and live with that decision you are making.

The hard and unfair truth is that not all of us are born into family that can manage the stress of financial uncertainty.

4. Do You Have A Strong Savings Plan?

Even if your business eventually turns out to be sustainable in the long run, personal cashflow challenge is one aspect that you cannot ignore.

Most businesses have cashflow challenges. Account receivable is one area that finance managers are always keeping a lookout of because poor management of your cashflow can potentially sink an otherwise profitable business.

From an individual standpoint, there might be days where you might need to allow your business to owe you unpaid salary in order to stay afloat. Your personal savings will have to step in for these challenging days in order for you to tide over short-term cashflow difficulty.

Read Also: 5 Reasons To Quit Your Job Even If You Have Not Found A New One

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.

Choosing the Right Crowdfunding Product

Interested in raising capital through crowdfunding? We’re not surprised. After all, crowdfunding comes with some pretty sweet advantages. The crowdfunding process is cheap, quick, easy – often entirely online. Because crowdfunding requires no collateral, it is a great alternative to traditional funding such as secured loans.

As we discussed in our last article, there are three major forms of crowdfunding: rewards-based crowdfunding, equity crowdfunding, and peer-to-peer lending. To learn more about them and compare the different forms, click here.

Each form serves a different purpose and targets a different demographic, so it is crucial that you pick the right crowdfunding product. Which crowdfunding product is your match? Below, we have provided a handy list for you to use. Read on!

Rewards-Based Crowdfunding

  • Rewards-based crowdfunding is for you if you are trying to pitch a project. It is meant to raise capital for products or services. Its purpose is not to fund your overall business.
  • Rewards-based crowdfunding is ideal for those in the creative or artistic field, or those developing new products and technology to get market validation and pre-orders before starting production.
  • Most rewards-based crowdfunding campaigns expect to raise around $10,000 – $100,000 according to this article.
  • This is a crowdfunding form that requires effort on your part. You need to create a business plan for your brand and your project, you need to do research, think about legal and tax issues in advance, plan the rewards you will offer your supporters, and craft a compelling story or video to market your project and entice new backers. For more details, check out this Forbes article.
  • Costs include: reward and shipping costs, income taxes, and platform fees.
  • Key platforms include Kickstarter and Indiegogo. Coincidentally, Kickstarter has opened new branches in Asia, including Singapore.

Equity Crowdfunding

  • Equity crowdfunding’s primary purpose is to fund startups with strong growth potential.
  • Because equity crowdfunding is essentially a barter of company shares for funds, ask yourself: are you willing to part ways with your company shares? Are you someone who likes to be in control of your company? If you are indeed willing to let go of company stocks and are looking to raise a large amount of funds, then equity crowdfunding is for you.
  • Equity crowdfunding campaigns expect to raise somewhere between $250,000- $3,000,000.
  • Like rewards-based crowdfunding, equity crowdfunding requires effort on your part. Your startup may be very promising, but you still need to pitch its worth to potential investors on your chosen platform.
  • Costs include platform fees and of course, partial ownership of your business.
  • Key platforms include: AngelList and CircleUp.

Peer-to-Peer Lending or Debt Crowdfunding

  • Peer-to-peer lending provides loans with competitive rates and no collateral. Depending on your chosen platform, you can crowdfund personal loans or business loans.
  • However, peer-to-peer loans are especially useful for SMEs and the underbanked segment.
  • Ideal for small businesses searching for short-term credit to strengthen cash flow, to expand their companies, to finance a newly secured project, or just for operating expense.
  • Here’s an example: businesses with income tied in accounts receivable are a great target segment for peer-to-peer lending as they can have quick loans through invoice financing to start new projects while they wait to get paid.
  • A good option for younger, smaller, and revenue-generating companies, but with no suitable assets for secured loans.
  • Peer-to-peer lending campaigns expect to raise around $20,000-$500,000.
  • Requires less effort on your part compared to rewards-based crowdfunding and equity crowdfunding. Your chosen platform will do credit assessment to see if you are suitable for a loan and take care of the rest. You don’t need to market your funding needs.
  • Costs include platform fees and loan interest.

If peer-to-peer lending sounds like the crowdfunding product for you, you can learn more here and apply for a peer-to-peer loan at Funding Societies here.