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How could you achieve 13-14% investment returns?

Article by Damon Wong

Dear investor,

Imagine you have some savings, so you’re looking to grow the money with a profitable business idea… But you don’t want to place your hard-earned money at risk by investing in the wrong things.
I know of an investment vehicle that is generating a double digit percentage growth for its investors… The best part?
The investor chooses how much and how long to invest in. And then it’s hands off until the time to pick up the check.
If you’re keen on making returns of 13%, riding on the wave of promising Singaporean businesses on their way up…
That’s where Funding Societies comes in.
They open doors to a selection of companies worthy of your investment. In fact, the performance of these companies is backed by research so you don’t have to do the heavy lifting…
As you read on, you will find out what Funding Societies is and how you can possibly achieve returns of 13-14% by investing with them.

1) What is Funding Societies?

Funding Societies is a peer-to-peer lending platform for retail investors like you and me to fund local businesses’ growth.
What’s unique about peer-to-peer lending, you may ask?
The main reason peer-to-peer lending is attractive to many… is the fact that it opens up investment opportunities to people like you and me.
It gives you access to investing in companies previously unavailable to the people – Companies (with huge growth and profit potential) that you’ll never have the chance to invest in… if not for the benefit that peer-to-peer lending provides you with.
And if you wish to invest in promising businesses that even expert investors are dying to get their hands on, getting a return of 13% on the investment while doing so… Then you must read on for how it may turn out to be the most feasible investment decision you make this year.
When investing, you want to keep risk at a manageable level. You want flexibility in the lock-down period that’s less than other instruments… So that when you plan for your expenses, you can look forward to seeing your money come back sooner.
As soon as 3 months should you wish.
Whether you’re looking to diversify a sizeable fund, or if you’re a retail investor with little ability to commit… you’re going to need different vehicles for your investment objectives.
Funding Societies enables investors like yourself to find the investment vehicle that matches your budget you set aside for growth.
Your investment in SMEs strengthen the backbone of our society. SMEs that make up 99% of all companies, SMEs that contribute up to 70% of the economy. By helping move the SMEs, you help move the economy…

2) Who Should Invest With Funding Societies?

a) Investors looking to diversify existing portfolio between short and mid term so they have the flexibility to get their money back whenever they choose;
b) Investors with limited funds but want to know exactly when the investment will mature, and how much to put in so they are always in control where their money goes;
c) Investors looking to make 13% returns on investment with a solid contingency plan in the event of defaulting payment, so they can sleep in peace at night;
d) Investors that support SMEs leading the culture of innovation, job creation, adding value to society, and at the same time growing their wealth with it.

3) How Safe Are My Investments With Funding Societies?

Funding Societies are offering a return of 13% on your investment. Regardless of how much you put in, you are in control of the exit period… Right from the start.
In fact, when you put your money down, an Escrow account managed by MAS registered Trust Agency holds on to it. What this means is that your money is in safe hands.
You can be currently invested in stocks, real estate, bonds… But Funding Societies provides you with an instrument that requires less lock-down time than any of the above, and is more stable than stocks. It lets you diversify your portfolio with better control over your risk and commitment.
Unlike some investments that require you to meet the broker at way-too-early o’clock to sign mountains of paperwork, Funding Societies makes it easier to grow your money by handling your transactions online. You can still do it in person should you wish, but the convenience of an online system is there.
You benefit from being an informed investor. Funding Society prepares and gathers both hard and soft data about the companies before you make an investment – a more comprehensive set of parameters than what banks do.

4) But What Are The Risks Involved?

You’re lending money to fund SME growth in Singapore. Behind every single company is a great mind and soul driven to make the business work.
Take it from our research done in interviewing owners.
With owners themselves being guarantors, they hold themselves and their businesses to high standards of accountability for you to invest confidently.
What this means is that when the companies you invest in close down, the owners have to pay you from their own pocket.
In the unlikely event of the SME defaulting, a collection agency steps in to recover the amount, giving you the right to pursue the matter legally.
This is the same collection agency that major banks in Singapore are using… Banks that have ATMs where probably withdrew your cash from earlier today. If they entrust this collection agency, you know you are in good hands to invest with confidence.

5) When Is A Good Time To Invest?

You heard of the saying that waiting for the best time to do something means never? But savvy investors recognize a good deal when they see one. Investors who make their investment before 31st Oct get their transaction fee waived.
Let me illustrate what is at stake here if you sat through this without doing anything.
Service fees are normally at 1%. For a $10000 investment, at 13% returns… That should put $1300 back in your pocket… But after service fee, that brings your earnings down to $1187.
You now have a chance for taking action, and for taking that action you now get to keep all of the earnings.
Back to $1300 of pure profit. The service fee is waived for your investment.
When SMEs that show great potential are identified, by 10000 other people reading this at the same time, some will be ready to take action…. You will want to secure the good companies to invest in before they get their funding and is no longer accepting anymore.

6) What Are Disadvantages To Investing With Funding Societies?

The disadvantage of investing with Funding Societies is that if you are currently holding on to a portfolio that’s giving you 25% returns from the stock market… Then this will not be beneficial for you at all.
Investing with Funding Societies currently offers returns of up to 13%… With a time period you can choose, and how much to invest that’s comfortable for your appetite.
So, if you find that you don’t want to take on huge risks when investing, and achieving returns of up to 13-14% sound reasonable to you…
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Three Key Risks of Peer-to-Peer Lending

The Peer-to-Peer (P2P) lending sector has gained quite a fair bit of attention as financial services have taken greater heights in its innovation phase in Singapore. The P2P platforms, gaining most of the limelight, are Funding Societies, CapitalMatch and MoolahSense as they have collectively raised more than $10 million in 2015.

The returns provided by P2P outshine general investments and depository instruments such as index investing and fixed deposits.

However, what are the key risks involved in P2P lending and what proportion of our investment assets should consist of such instruments?

3 Key Risks In P2P Lending

#1 Risk of Default

P2P platforms link people with excess money (investors) to businesses that requires extra money in order to grow (borrowers). By doing so, investors would receive return, in the form of interest payments.

In simple terms, we should think of it as us lending money to a friend in need. It would be possible that this friend of ours will make timely repayments back to us, or that the person may not be able to repay the money they borrowed.

P2P lending is done in a more professional manner with contracts drafted, signed and with limiting factors included in the agreement. Nonetheless, the fundamentals are similar.

Although the rate of default is currently quite low, with only a few bad P2P loans at risk of defaulting , we should be more vigilant because this is a new financial space just blossomed in the last 1-2 years.

How we should assess the risk of default on the broader perspective, without dwelling into professional jargons, is to assume that all of these loans would have risk levels above the types of business loans done in Singapore.

The reason is simple, if banks in Singapore are not willing to lend to these businesses, it is largely due to (a) lack of historical information – business only operating for <1 year, (b) businesses that banks are unfamiliar with, (c) high risk businesses – trading firms, (d) businesses that are deemed non-viable and (e) businesses marginally failed to meet the extremely strict criteria set by our banks.

If we are able to stomach such risk, then we should we consider investing into P2P loans.

 

#2 P2P Platform Operation Standards and Vision

What we mostly read about P2P and its risk is largely associated with the risk of default by the businesses that we are investing (through lending).

What is equally important is the P2P platform, which plays the most important role in managing the risk of default since they are the ones assessing the businesses and deciding whether or not these businesses should be put through to their platform for funding.

We have to understand two key things (a) how the P2P platforms assess the businesses and (b) long term vision of the P2P platforms.

As for (a), understanding the P2P platforms’ methodology in assessing businesses is important because we want to understand how the P2P platform is looking at the business before deciding whether or not to provide the loan. Furthermore, it allows market participants to feedback so that they can improve as well.

For (b), the long-term vision of a P2P platform is also important information. Like all businesses, if a P2P platform intends to stay in the industry and be a market leader, they have to ensure that they are always competitive and are the best at what they do. The simplest way of being the market leader and excelling in this business is to reduce default rates to as near 0% as possible.

 

#3 Lack of Transparency

If there is one thing that keeps us up at night when it comes to P2P lending, it is the lack of transparency in the underlying businesses where the loan originates as well as the methodology in assessing businesses.

 

Lack of transparency in underlying business

When some P2P platform raises money for the businesses, they would put only the industry of which the business (e.g. wholesaler, design and build, etc.) is in. The name of the business is not provided.

For investors who invest a larger amount, it would make sense for them to do some background check to get a sense of the viability. However, without the sufficient disclosure, it would be impossible to do so.

Some P2P platforms do disclose the names of the businesses they lend to, but we believe this should be the norm, rather than the exception.

Lack of transparency in methodology

We do not doubt the ability of P2P platforms to assess the businesses via their methodology. That is because they have incentive to ensure that their methodoloy is as foolproof as possible. However, without any “request for comment” from professionals in the industry, it’s hard for the market to know how these methodology works. It also means that investors have to place 100% trust in the platform.

 

What is the proportion of assets that should be allocated to such instruments?

The 3 key risks mentioned should not turn you away from investing as the returns provided are significant, ranging from as low as 10% to over 20% per annum.

As mentioned, if we are able to stomach the risks, P2P lending is a great way to diversify our investment portfolio.

Nonetheless, we would not advocate allocating a large percentage of your total investment assets into P2P just yet. At least not until the P2P platforms start to reduce the lack of transparency issues mentioned above.

 

 

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What Does UOB Investing In Peer-To-Peer Lending Platform Means For The Future Of Borrowing And Lending In Singapore

Just last week, UOB announced that they would be investing S$14 million into a global equity crowdfunding platform, OurCrowd.

For those who are not familiar with this type of lending, borrowing and funding, this is a relatively new type of peer-to-peer lending/funding, which in our opinion, would represent one of the key future of our banking industry.

 

What Is Peer-To-Peer Lending/Funding And Equity Crowding Funding?

To better understand how this industry works, let’s first review what commercial banks do.

One of the key functions of commercial banks like DBS, UOB and OCBC is to act as a financial intermediary between lenders and borrowers. Lenders represent people who have excess money, and who would like to keep their money in the bank account for safekeeping and to earn an interest. Borrowers represent those who are in need of funding. This could include companies such as Small Medium Enterprise (SMEs).

Instead of lending your money to a bank at a low interest rate, only for the bank to lend out the same money you gave them to an SME at a much higher interest rate, peer-to-peer (P2P) lending allows you to lend directly to the company that you want to lend it to, at a much higher interest rate than you would ever be able to attain from a bank.

 

Lending Money Vs Investing Money In Companies

DollarsAndSense.sg have been covering the P2P industry for some time and we understand that there are some differences in terms of the investing mechanism for investors. This can come in the form of equity and debt.

 

P2P Debt Lending:

P2P lending allows investors to lend money directly to borrowers. In Singapore, these borrowers are typically SMEs. We understand that for P2P lending platform such as Funding Societies, lenders can expect a return of about 12% – 16% per annum. Other platforms such as Capital Match also provide similar returns. Loan duration are usually about 6 months to 2 years.

From our discussion with these companies, we also understand that most of the borrowers accept onto their platform are established SMEs that have stable revenue. However, some of these companies may have insufficient credit history to be able to secure loans or credit lines from commercial banks. As such, they rely on P2P lending to help them with their short-term cashflow needs.

There is no question on the risk involved with P2P lending. The risk-return tradeoff theory states that you cannot expect higher returns without taking on a greater risk. When you lend to a commercial bank like UOB, the risk of you not getting your money back is extremely low which coincides with the extremely low returns you get. When you lend to an SME directly, there is a much greater risk of default that you bear in return for the high returns that you enjoy.

Read Also: How Peer-To-Peer Lending Can Help SMEs

 

What About P2P Equity CrowdFunding?

Think of equity crowdfunding as an episode of the Shark Tank or Dragons’ Den. Interested investors can purchase equity in a business of their choice as long as they are willing to meet the business owner’s asking price. In return, they get to enjoy the upside if the business performs well.

Common senses would suggest that P2P equity crowdfunding would be more risky than debt lending because there is no legal obligation for the money invested to be returned. In addition, companies that are willing to give up equity in return for investment are usually those in the start-up phase who still do not have a steady stream of revenue.

 

What UOB Investment Means For Personal Finance In Singapore

If this is your first time reading about P2P lending, it would be normal to feel slightly sceptical. People should never compare lending money to SMEs as the same thing as lending money to an established commercial bank like UOB.

However, the fact that UOB has invested money into an equity crowdfunding platform and intends to open it up to some of their valuable accredited UOB clients, it shows that the company is expanding its product range to suit its customer’s needs. These savvy investors are no longer satisfied to simply give their money to UOB and allow the banks to dictate where their money would go and the returns they should get.

Rather, they want to have choices and the banks are looking to provide their service by giving their clients these choices.

Safer Now Because Of The Endorsement Of Commercial Banks?

We want to debunk a myth before we conclude this article. Just because a local bank finally joined the P2P lending & funding scene, it does not make this sector any safer or riskier than it used to be. The risk exposure is similar as before.

The only thing it means is that the sector has now grown to a size that the local banks can no longer ignore. They either have to join in, or watch the boat sail by without them.

For a new sector like this, we think that by looking into the debt lending and being assured of a fixed return over a period of 6 months to 2 years is a lot safer than making equity investments into companies. Having said that, this is a sector where interested investors will need to go in well informed.

Read Also: 3 Reasons Why Peer-To-Peer Lending Should Be In Your Portfolio
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