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How Peer-To-Peer Lending Supports Financial Inclusion

Financial inclusion is increasingly becoming a buzzword in the finance arena. While crucial in setting a strong foundation for development, the Southeast Asian (SEA) region and the world still has a lot of room for improvement. This is where Peer-to-Peer (P2P) lending can step in to steer the money lending economy in the right direction.

Why is financial inclusion important?

Financial inclusion refers to people and businesses having access to affordable and useful financial products and services, delivered in a sustainable manner. This can include access to transactions, payments, credit, savings, and insurance, just to name a few.

A crucial foundation

Financial inclusion is important as it contributes directly to the ability of communities to develop and grow. It equips people with the tools to manage their wealth by having savings and enabling the allocation of resources to various aspects of their lives such as health, education, and business. According to the American Economic Review, financial inclusion can aid in the reduction of poverty through an increase of one’s income potential and asset-building capabilities. Financial inclusion also acts as a safety net to let companies survive financial emergencies through business loans.

The state of financial inclusion in SEA

Despite the importance of financial inclusion, many individuals and businesses still lack access to quality financial services. Global Findex Database found that 1.7 billion people worldwide do not have access to basic financial services, like a bank account. Deloitte reported that less than 60% of Small Medium Enterprises (SMEs) in Indonesia, Malaysia, Philippines, Singapore and Thailand have access to bank loans as a means of financing. Shockingly, the region around us continues to use personal funds as a dominant source, particularly in Indonesia.

The reality is that SMEs’ financial requirements are more often than not too large for microfinance, yet too small to be effectively served by corporate banking models. As such, there are many underserved companies with poor access to mainstream financial services and need to rely heavily on alternative financial services.

How does P2P lending support financial inclusion?

The presence of financial exclusion reveals a potential market for lenders. In particular, P2P lending can help address the issue of accessibility while providing an alternative form of investment.

Accessibility upgrade

P2P lending brings lenders and borrowers in direct contact through a common platform. By skipping traditional financial institutions through a convenient digital platform, the P2P lender is able to enhance access to much-needed working capital. Lenders and borrowers are not bogged down with the same degree of bureaucracy and regulation imposed by traditional credit providers, and other measures of assessing creditworthiness are in place. Instead of waiting for a week to process loan applications, a more immediate relief can be provided through P2P lending for business emergencies in the form of SME loans, bridge loans, invoice financing, and more.

Viable investment opportunity

On top of the improved access to funds, P2P lending also adds more options to the pool of investment types available. As opposed to a large starting capital of $10,000, P2P lending allows easy entry with affordable options starting from $20. New and seasoned investors alike can look forward to diversifying their portfolio through this form of alternative investment.

In this digital age, there are lesser excuses for financial inclusion to remain problematic. Banks and Fintech businesses need to ensure that the underserved community is not left behind. P2P lending has the potential to reinvent the funding sphere.

Read Also: Step-By-Step Guide To Investing With Funding Societies In 2019

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Top 3 Announcements From Budget 2019 That SME Owners And Entrepreneurs Need To Know About

On Monday, 19 Jan 2019, Finance Minister Heng Swee Keat delivered the Budget 2019. Mr Heng announced new initiatives and expansions worth S$1 billion, aimed at enabling businesses to grow. Here is how Budget 2019 will impact your business.

The budget outlines three areas of focus to deepen enterprise capabilities:

1. Customised Assistance 

The budget highlights two programmes help you identify and overcome business challenges – the Scale-up SG programme and the Innovation Agents programme.

The Scale-Up SG programme is an initiative by Enterprise Singapore that partners you with companies in both private and public sectors to provide you with advice on how to scale up your business.

The Innovation Agents programme allows you to tap on the expertise of experienced industry professionals by matching innovation experts with your business. The experts will provide you with advice on innovation and commercialisation opportunities.

2. Increase Technological Adoption 

The SMEs Go Digital programme that was launched in 2017 will be expanded to other sectors. The programme aims to help you use digital technologies and improve digital capabilities in areas such as accounting, human resources management and payroll, digital marketing, digital transactions and cybersecurity.

The programme will also provide your business with Industry Digital Plans (IDPs) which contains advisories on which digital technologies to adopt.

3. Improved Financing Options 

Mr Heng announced an additional S$100 million for an SME Co-Investment Fund III. This is in addition to S$400 million set aside since 2010 to invest in SMEs, alongside the private sector.

Existing schemes by Enterprise Singapore will be streamlined into a single Enterprise Financing Scheme which will be launched in October.

The SME Working Capital Loan Scheme will be extended for two more years, until March 2021. It will then be folded under the Enterprise Financing Scheme.

Under the Enterprise Financing Scheme, the government will take on up to 70 per cent of risk for bank loans to younger companies that have incorporated for less than five years.

As you look forward and plan for the fiscal year 2019, it is wise to stay updated with government initiatives that may provide financial support for you and your business. On top of that, you may also want to look into alternative financing options such as Peer-to-Peer lending(P2P) to help to fund new and additional projects.

P2P lending is an offshoot of crowdfunding that matches investors and SME-owners through an online platform. You can take up a loan for your business while investors that collectively funded these loans will earn an interest in return. P2P lending holds many advantages for SME-owners as it has an easier and quicker application process than traditional financial institutions and requires no collateral. This enables many SMEs with limited credit history to obtain business funding.

For further reading, check out our definitive business financing guide where we will endeavour to cover all aspects of financing your business.

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5 Key Reasons Why Successful SMEs Take Business Loans

One of the greatest misconceptions about SME financing is the notion that taking on debt is always a bad thing. Many people associate loans (aka. debt financing) with financial difficulties and cash flow problems and often assume that companies will only take up loans if they are in a poor cash position. However, this cannot be further from the truth.

Did you know that even large and established companies such as Apple still take on business loans? There are many advantages to debt financing that are often overlooked by SME-owners due to risk adversity or years of hearing misguided information.

This is the opportunity for you to uncover the perks of undertaking on business loans (and the precautions you can take) so that you can clear your misconceptions and make an informed financing decision.

#1 To Speed Up Business’ Expansion And Growth Rate

Common Myth: A healthy business always has excess cash on hand and will not require any form of business loans.

The truth is that excess cash may not always be a good thing, as it begets the question of “Why isn’t this excess funding being reinvested into new investment ideas and expansion opportunities?”

A healthy business will usually be seeking ways to speed up their rate of growth. Hence, it will often utilise excess cash to increase its capacity for growth (through upgrading equipment and machineries, increasing marketing efforts or expanding working capital).

However, relying on cash-flows alone to finance growth is often insufficient for businesses and may cause them to take a longer time to reach its goals. Therefore, many successful SMEs choose to leverage business loans to accelerate its expansion and growth, which is an opportunity you can consider for your business as well!

Possible Precautionary Actions: Create a revenue forecast based on existing balance sheets to ensure that your business will be profit-making on top of covering loan repayments.

#2 To Avoid Cash-Flow Issues

Common Myth: Cash-flow problems are an inevitable reality for SMEs.

It is true that many SMEs struggle to maintain a positive cash-flow due to a multitude of reasons:

  1. Freak Incidents i.e. Warehouse fire or natural disasters that may affect supply shipments.
  2. Cyclical Business Downturns i.e. A restaurant chain may face business slowdowns in certain periods of a year, where their operating costs may be greater than that period’s revenue.
  3. Poor business decisions/estimations or negligence of partners i.e. A firm overestimates its financial ability to follow through with a large project or subcontractors face financial problems due to main contractor’s delayed payments.

These unexpected circumstances may cause an inevitable fall in period cash flows. But they can be easily remedied through undertaking business loans in advance, to allow cash to be set aside as a buffer against such circumstances. A stable and affordable line of credit also allows your business to continue operating as normal during cash-strapped periods. Generally, loans help prevent your overall business cash flows from being susceptible to uncontrollable situations and cyclical downturns.

Possible Precautionary Actions: There are other actions you can take to better manage your cash flows, you can find out more on 5 Steps For Better Cash Flow Management.

#3 To Capitalise On Business Opportunities

Sometimes, there may arise unexpected opportunities for the business such as:

  1. Discounted bulk orders of inventory
  2. Retail space priced lower than market rate
  3. Good deals on vehicles auctioned off by banks in a foreclosure

Having extra cash on hand or obtaining a business loan will allow your business to capitalise on these opportunities in time to potentially generate greater revenues. This is also important for businesses in capital-intensive industries such as manufacturing.

They often need to spend large amounts on machinery, labour and inventory far before they start receiving any revenue from their projects. They risk having insufficient funds to complete the project if unexpected expenses are incurred midway through. A solution is to cover these heavy initial investments with short-term loans to leave the business with sufficient cash reserves.

Potential Precautionary Actions: Conduct a revenue forecast to estimate the true costs and profits generated from this investment. It will be helpful to determine the return on investment of the opportunity through weighing the cost of the loan against the potential revenue that can be generated. Basing decisions on hard number rather than gut instincts will prevent over-enthusiasm from clouding your judgment.

#4 To Build Creditworthiness And Profit Off It

Do you know that taking on a loan can reap long-term benefits for your business?

When your business undertakes a loan, it establishes relationships in the financial sector and builds up lenders’ confidence through timely repayments. This is especially important for young SMEs that often find it difficult to qualify for larger loans when they lack a strong credit history to support its request.

Responsible debt financing will help to boost your business’ creditworthiness and business credit score. This may increase your chances of getting bigger loans in the future as your business grows.

The saying that the “bank is a place that will lend you money if you can prove that you don’t need it” also holds very true here. The best time to apply for a loan is the period where your business is financially strong, maintaining healthy cash flows and has a comprehensive business plan for future growth. It is wise to take advantage of periods with higher credit ratings to apply for loans, as banks and investors will perceive lower risk and issue a lower interest rate on the debt. SMEs can also re-invest excess cash in securities or instruments that repay a higher interest rate, profiting off the difference in interest rates.

Possible Precautionary Actions: SMEs should be cautious of taking on an early loan and ensure its ability to afford the loan as every late payment on a small loan may affect their qualification for future bigger funding.

#5 Debt is Cheaper Than Equity Financing

Common myth: Equity Financing is better for SMEs as investors will bear all risks and SME-owners will not be liable if the business fails.

Although equity financing has many upsides such as decreasing risk for SME-owners and allowing the business to have more cash and less debt, the truth is that its downsides are incredibly large.

Equity is an expensive financing method as it incurs a greater loss in the long-term. It requires you to give up a stake of your business in exchange for cash. Although 5%, 10% or even 15% may seem a reasonable percentage of equity to give up when your business is cash-strapped, it actually dilutes your ownership of your business.

Ownership governs your control over management decisions affecting small decisions such as the hiring of workers as well as big decisions such as which projects to undertake. The general rule of thumb is that equity investors will seek to have a degree of authority over decisions made by the businesses they invest in, making it unwise to relinquish a large portion of your ownership over your company.

On the flip side, debt financing allows your current management to retain full control and does not dilute your ownership. It also has other advantages such as:

  1. Tax benefits: Interest payments on loans are tax deductible and will decrease the amount of revenue that’s taxable. Comparatively, dividend payments to equity-holders are not tax deductible.
  2. Lower obligations: As equity-holders risk losing all their investments if the business closes down, investors usually expect higher returns. Comparatively, business loans can usually be sourced at a lower interest rate.
  3. Easier forecasting: Loan payments do not fluctuate as much as equity prices, making it easier to forecast expenses.

Possible Precautionary Actions: Too much of a good thing can be a bad thing. Although debt-financing is a good option for SMEs, it is important to not over-leverage and risk defaulting on loans. There is a significant amount of risk for the borrower if they lack confidence in loan repayments. Larger SMEs often use a combination of debt and equity financing to reduce the downsides of each method. You can find out more here on Debt vs Equity Crowdfunding.

In the past, SMEs often found it difficult to obtain a loan even if they recognised its advantages and are interested to undertake one. This usually occurs due to the long application period from traditional financial institutions and lack of business collateral or credit history to back its loan request. This is a common problem faced by SouthEast Asian SMEs that you can find out more about here on The SME Funding Gap in SouthEast Asia.

Fortunately, the proliferation of online financing platforms has led to more sources for SMEs to obtain loans from. One key option is Peer-to-Peer (P2P) loans that can be obtained through debt crowdfunding platforms such as Funding Societies in Singapore. This enables SME-owners to obtain loans much quicker — with simpler request procedures which can even be done through this popular business loan mobile app FS Bolt. You can find out more about Peer-to-Peer Loans here to make a more informed financing decision in the future!

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4 Top Finance-Related Issues Faced By SMEs In Singapore

Businesses, especially SMEs, have grown highly competitive in the past 10 years. Local competition is not new, but international and online competition have kept small businesses on their toes. And along with the general cost of living, cost of doing business has gone up as well. In such a scenario, it is absolutely essential for SME owners to keep an eye on their cash flow.

According to an NUS Enterprise study, almost half of all start-ups fail in the initial stage because of cash flow issues in the business. As one of our SME clients aptly explains, “Cash Flow is King” without cash flow, businesses cannot survive.

SMEs face a number of business challenges. According to DP Information Group’s SME Development Survey of 2017,  the biggest challenge for SMEs is financing. Over a third of SMEs surveyed reported finance-related issues. This was up more than 13 percentage points from the previous year and almost doubled since 2014.

What are the finance-related issues plaguing SMEs?

Based on the survey conducted between 2,522 SMEs, four main issues were highlighted by SMEs in 2017.

Statistics based on SME Development Survey of 2017*

#1 Delayed payments from customers

This is the most common issue faced by SMEs. Due to seasonal fluctuations, your clients may not be able to pay you on time. One possible solution is invoice financing, which will be discussed later in this guide.

Read Also: What is Invoice Financing?

#2 Higher interest rates for bank loans

SMEs also highlighted that they encountered higher interest rates when they go to the bank. According to this Business Times article, four in 10 Singapore SMEs lack support from financial institutions. While certain banks are recently looking to grow their SME lending, financial support for Singapore SMEs doesn’t exclusively come from banks.

#3 Suppliers tighten credit access

As financing gets tougher for companies, suppliers start to tighten credit access to their debtors. Suppliers may require companies to pay for inventory upfront or at shorter notices.

#4 Need more collateral for the same financing

Typically, traditional banks would require collateral for SME loans of larger amounts. SMEs have highlighted the need for more collateral for the same financing.

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Running A Small Business? Here Is What You Need To Know About Your Business Revenue And Expenses

Having proper accounting will enable you to check the health of your business. Hiring an accountant and adopting proper accounting software will ensure that you properly track your revenue streams as well as expenditure.

Business revenue

Let’s start with revenue. Typically, businesses have a core revenue stream. By accurately measuring the performance of each revenue stream, you will be able to identify and plan for revenue growth. As mentioned in the previous section of this guide, SMEs often encounter revenue issues such as delayed payments from customers. In your business planning, besides brainstorming on how to grow a certain revenue stream, you should also prepare a forecast for future revenue.

Business expenses

In general, businesses have two types of expenditures – capital expenditure (CAPEX) and operating expenditure. (OPEX) The main difference between these two expenditures is that in the case of CAPEX, these are expenditures incurred by the business for future use. In the case of OPEX, these expenditures are incurred by the business to ensure the business stays operational.

Here is a basic list of expenses a typical SME is expected to have:

Common CAPEX Expenses Common OPEX Expenses
Hardware Purchases
Equipment Purchases
Vehicle Purchases
Other assets purchases 		 Employee / Staff Costs (Salary and CPF contributions, Medical Expenses and Retrenchment benefits)
Rent
Utilities (Water, Electricity, Internet)
Taxes
Repairs and maintenance cost
Upkeep of business premises, equipment and machinery
Cost of travelling on public transport
Research & Development Expenditure
Administrative fees, including business licencing

In every business, it is inevitable that the list of expenses is long and numerous. In addition, many businesses face unexpected expenses which makes it hard to project expenses accurately.

Unexpected business expenses are incurred when business encounter situations such as sudden change in consumer demand, equipment breakdowns and increase in the cost of supplies. These situations are unpredictable and can occur regardless of the nature of your business.

To prepare for such situations, many businesses set aside a “rainy-day” fund. A rainy day fund is an emergency fund that helps to cover any short-term unpredicted business expenses. For businesses who do not have such a practice, you may want to consider getting a business loan.

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How Startups And SMEs Can Use Fintech To Fuel Growth

The financial technology (FinTech) field grew and developed rapidly as a response to the financial problems we face, from making financial information more accessible to addressing the lack of financial inclusion in various countries. Small and medium-sized enterprises (SMEs), in particular, can benefit from the digital solutions offered by FinTech. For instance, FinTech offers e-payment and bookkeeping services that SMEscan take advantage of.

But most of all, FinTech can provide business financing solutions for SMEs. The growth of any small and medium-sized enterprises (SMEs) is dependent on the health of their finances, especially on having the appropriate funding. Certain business models within FinTech, such as peer-to-peer (P2P) lending, can be an alternative source for SME working capital loans.

FinTech as an online financing platform

To grow, SMEs need working capital. SMEs often choose to apply for loans to finance their business development. However, traditional financing products can have regulations, criteria, and processing time that are incompatible with SME needs. Often, requirements for collateral can stop a promising SMEs from getting the financing they need.

FinTech models such as peer-to-peer lending offers a solution: by building an online financing platform for SMEs. Since it is online, the application process tends to be faster and simpler. Certain P2P platforms also have apps and a small business owner can easily apply for financing through the app. The loan product also keeps SMEs in mind, with no required collateral.

FinTech as an accounting and bookkeeping service

Small businesses sometimes neglect the importance of accounting, even though it is crucial for any company to stay aware of their financial condition. Well-managed financial statements will help SMEs identify problems they are currently facing and how to bring the company to a better, more profitable place. Sometimes, small businesses simply lack the capital to hire an accountant.

These days, some FinTech platforms provide accounting technology to help manage SME financial statements. The platform also allows SMEs to have an easier invoice and payment process. Many of these accounting services are based on cloud servers so business owners can access their data anywhere, anytime.

If you do use cloud-based service providers, remember to implement the appropriate safeguards. Read more on “How to Protect Your SME from Cybercrime”

Fintech provides electronic and digital payments

FinTech digital payment solutions, such as online and mobile payment options, along with multination and multicurrency options will help businesses gain a simpler way to manage financial transactions. The electronic and digital payments solutions will especially help small businesses sell their products and services to a wider audience than if they were only dependent on cash.

Digital solutions and innovations pioneered by FinTech bring great impact for SMEs. By utilising FinTech innovations, SMEs will more easily adapt to the digital age and grow their operations.

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Reviewing 2017 Business Performance, Achieving 2018 Goals

Is there a better time than the first work days of the year to reflect on business goals? If you spent the final days of 2017 scrambling to collect data and make reports, it’s time to review the past year’s business performance. For many businesses, this is the only time of the year when they have a complete set of accounts. Through them, you can see how much money you are making and spending; specifically, where the majority of your profits and revenue come from, and where your money is being spent – and if some of the expenses are unnecessary and can be cut.

You can also use 2017 reports to check on business health. Here are 3 tips to help you start your business on the right track in 2018.

Check the Health of Your Business

Other than revenue, profits, loss, available working capital, total assets, and debts to pay off, other factors within your financial statements can help you determine business health. For one, check the balance between revenue and expenses overtime. With business development and expansion, it’s perfectly normal to spend more on expenses. However, a healthy business will balance its revenue and expenses, with spending under control.

But more than financial ratios, comprehensive market research and understanding of clients bolster business success. It is paramount for a business to have a strong and well-thought-out business plan to cope with supply and demand uncertainties. A clear business plan helps align goals and unites your team by having their responsibilities defined and working towards a common vision. Haven’t got a business plan? Take the time to make one – it is of utmost importance.

Read more: “How Healthy Is Your Small Business? 5 Signs to Look For” and “Business Planning 101”

Better Manage Working Capital

Efficient working capital management ensures business liquidity. Liquidity may often be overlooked, but it is arguably as important as profitability. A business needs cash to cover short term expenses.

To figure out where you stand, calculate your current working capital ratio. Divide current assets such as cash, inventory, and accounts receivable by current liabilities. If the ratio is less than one, your business does not have enough working capital to settle short term debts. While the standard varies across industries, a ratio greater than 1 implies the business is in good financial position.

If you are struggling with managing working capital and need more cash, try looking into your stock inventory and invoice management practices. Perhaps you are carrying more inventory than needed and should adjust orders to optimize storage. Or perhaps much of your income is tied up in accounts receivable.

Read more: “How to make working capital work for you”

Consider a Business Loan in the New Financial Year

If your business goals for 2018 include big projects and development plans, maintaining sufficient capital is key. Depending on the amount of capital you need, you may need to apply for a business loan. Here are some instances where the timing may be right to start researching for suitable business financing:

  • You are looking to fund capital expenditure to optimize business productivity, (i.e, you need more equipment to accommodate growing sales volume but current profits are not sufficient to cover the costs).
  • You want to start business expansion or expand your product offerings. To do so, you need enough capital for various expenses, such as research and development, building new outlets and channels, hiring more human resources, launching marketing campaigns, etc.
  • You need to fix some cash flow issues, perhaps if invoice payments are late or consistently get stuck. Business solutions that allow you to convert accounts receivable to cash, such as invoice financing can help you enhance cash flow while you put a more efficient invoice process in place for your company.

The start of a new year is a hopeful time. You haven’t missed any deadlines and the days feel full of opportunities. This is the time to (a) discover problem points to fix, (b) understand how healthy your business is right now, and (c) know what to do in order to achieve all the targets you have planned for 2018. Good luck!

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.  To learn more about them, visit their website here.

Funding Societies is a DollarsAndSense Brand Connect partner. You can find out more about what they do on the DollarsAndSense Brand Connect Page.

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Building The Best Team, No Matter How Small Your Business

A rookie mistake often made by those just starting a new business is thinking they can handle everything on their own. It’s still a small business, after all, so why would I need more people to help me, they think. As a small business owner, I should be able to wear many hats, they say.

However small a business started, it will eventually grow. So will yours. And every entrepreneur wants his business to consistently and steadily grow. Without the right team on your side, quality business growth is unlikely to happen. You need a great team and you can’t waste time when building one.

The thing is, building the best business team isn’t as easy as it sounds. How do you find the right people? How do you get them to work well together? How do you build the best business team even if your business is small?

Employing staff isn’t just about filling a role

Don’t rush into employing people just to fill a role. Ask yourself: what skills do I lack?

Answers to that question will help you identify what roles you must fill, along with the type of work you need the new person to do. In a small business, it’s important that the employees fit with the company and with each other, so make sure the people working with you believe in your business idea and vision. If they don’t, they won’t feel engaged and won’t bring additional value to your business.

Read also: Is Having No Job Better Than A Bad First Job?

Understand the strengths of each individual

It’s a given, each of your employee will enter the workplace with different personalities, quirks, and sets of values. Therefore, they will have different ideas about how to do their jobs. As a business owner, it’s important to recognize this, even if the way you work clash. People have different strengths and so long as your employees are contributing to your business in a healthy way, you’re on the right track. Just create an environment where people can channel their strengths and discuss their ideas or disagreements in an open, healthy fashion.

Explain your business goals

Before you officially start working with the new team, make sure everyone is on the same page. Let them know what they are aiming for and help them understand the goals of your business. It’s better if you have already created a vision of where your team should be —six months, a year, or two years from now. This will give your team a feeling for the situation in which they are working and the goals they are working towards.

Read also: Life At A Fintech Startup: 5 Interns Share Their Lessons Learned

Define roles as clearly as possible

Once everyone understand what the goals are, you can start bringing out the best in them. Make sure everyone is clear about their responsibilities, what is expected of them, and what is not. If you don’t make this clear, your team will work in confusion. They are not sure of their respective roles and boundaries. On a larger scale, business progress and efficiency will be affected.

Don’t forget that team roles are not static. As a business expands and various players show their strengths and results, you will need to periodically update roles and task list.

Are team building exercises necessary?

Here’s the honest answer: it depends. Small businesses are often fast-paced environments, so you need to get your team working together quickly. Team building exercises can help, but consider your budget to calculate whether you can afford them. Sometimes providing snacks when staff has to work late, or going to karaoke on a Friday night, is enough to get the band together and show that management cares.

In order to improve team performance, ask them to provide feedback. Listen carefully to what everyone says. Use the feedback to evaluate not only team performance, but also your own effectiveness as a leader. Last but not least: have fun building and growing a business with your new team!

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.  To learn more about them, visit their website here.

Funding Societies is a DollarsAndSense Brand Connect partner. You can find out more about what they do on the DollarsAndSense Brand Connect Page.

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Budgeting: Balance Your Spending

“My money keeps spilling out like water.”

Many of us have experienced the frustration of having too many expenses to track. We have to pay for housing, utilities, taxes, transportation, food, the list goes on. Sometimes we can’t catch a break despite bringing in a reasonably good income.

It’s normal to feel overwhelmed about expenses from time to time. But when the feeling expands to a paycheck to paycheck lifestyle, you need to start a budget.

A personal budget is your own spending plan. It’s necessary for a myriad of reasons. Budgeting helps you spend less than what you bring in. It helps you identify problem areas, such as impulse buys. It helps you prioritize your spending and manage your money. It also helps you keep track of your financial goals: are your savings progressing towards your short-term and long-term goals?

In spite of its importance in a solid financial plan, many people avoid budgeting. The word is unfortunately associated with deprivation and excessive cheapness. But a good budget means living well rather than living poor. A good budget, like most aspects of life, requires us to create balance.

Before crafting a personal budget, we first need to differentiate a want vs. a need.

Imagine three buckets. Bucket #1 is for compulsory expenses, such as food, rent or housing, and “overhead” costs like utilities. Generally, bucket #1 is categorised under fixed expenses and there shouldn’t be too much fluctuation of cost between months.

Bucket #2 is where you drop your investments and savings. Bank deposits, retirement funds, property investments, bonds, and stocks all belong to this category. Lastly, Bucket #3 is for discretionary spending, such as travel, shopping, hobbies, and nights out.

It’s easy to guess which are “wants” and which are “needs” isn’t it? Bucket #1 and Bucket #2 contain “must haves” while Bucket #3 contains “nice to haves.” While items in Bucket #3 are mainly “wants” and “nice to haves,” you still need to moderately indulge in them to live a happy, balanced life.

We also need to separate personal assets and liabilities. Assets include your house or apartment, your vehicles, your checking and savings accounts, and your investments. Alternative investments such as art and jewelry can also count.

Mortgage and car loans are liabilities, but will be considered assets when paid in full. Credit card debt and personal loans tread on more dangerous territory, as their interest rates are high and they don’t become assets when paid in full. Also, beware of indulging in too many “wants.” Eventually most of them depreciate to nothing, becoming sunk cost – when the money could have been used to purchase assets.

Read also: 5 Useful Tips To Keep Your Business Finances Healthy

On to business. Let’s discuss the three steps of budgeting:

#1 Start by tracking your spending

There are many ways to keep track of your expenses – there is no correct method. You can use a notebook and pen, a Word doc, an Excel spreadsheet, or even personal finance apps like Mint and Toshl Finance. What matters most is consistency.

Note down all your spending, even small ones like your daily latte – the point of this first step is to know where your money is going. Update your budget regularly so you won’t forget anything. Use accurate descriptions for your purchases, such as groceries, clothes, etc. Again, you want to know exactly where your money is going.

Tracking your spending is essential as it helps you identify problem spending areas and readjust your priorities. It also helps you tailor your own spending ratio.

#2 Analyze your expenses, prioritize, and create a spending ratio

Remember the three buckets? Most of your income should go to Bucket #1 (Compulsory Expenses) for food, lodging, and utilities. Try to achieve a good balance between Bucket #2 (Investment/Savings) and Bucket #3 (Discretionary Spending), especially if your notes on expenses show you are overindulging. Spend less on “wants” and think about your future financial goals without severely depriving your fun.

Figure out a ratio for where your income should go. This Forbes article suggests a 50/20/30 ratio for Buckets #1, #2, and #3. A Google search of the “personal budget chart” shows many different approaches to personal budgeting. The key here is finding the ratio that works for you. It is you who decide what your priorities are.

Can’t calculate a ratio? Don’t fret. Just try a ratio combination and see what fits your personal expenses and needs. Make adjustments if you need to.

Read also: 5 Steps For Better Cash Flow Management

#3 Track your budget overtime

Now that you’ve created a budget, here comes the most crucial step: sticking to it. Do your utmost to follow the spending ratios you’ve set up – with an emphasis on reasonably saving and investing your income. You can only gain the benefits of a personal budget if you track your progress and make sure you are spending below your income. Your budget acts as a progress report: are you prioritizing well and saving enough?

If you find it difficult to stick to a budget, you may be spending too much on unnecessary items – remember future goals like owning your own home! At the same time, if you’ve only started budgeting, relax. As time goes on, you’ll see a difference in your spending habits overtime. Check the difference in spending after 3 months. You might surprise yourself. Just stick with it.

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.

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Alternative Investments

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.

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