Are you an entrepreneur seeking to raise funds but unable to secure a bank loan? Or perhaps an investor looking to diversify your portfolio?
If you belong to either category, you may wish to consider crowdfinancing. Unlike traditional means of securing funds through bank loans or equity investments, crowdfinancing (or crowd-lending) allows businesses to borrow money through an online peer-to-business platform from individual lenders.
A subset of crowdfunding, the concept of crowdfinancing is similar to what platforms like Kickstarter or Indiegogo offer except that lenders (or investors) expect to receive their money back plus interest after a specified period of time. Also known as debt-based crowdfunding, it also provides an alternative route of fundraising and investment for business borrowers and individual investors alike.
With crowd-financing or peer-to-business lending platforms, SMEs can diversify their sources of financing and raise funds from like-minded individual investors. They can select the lowest interest rate offers from investors, hence reducing their cost of capital.
On the flip side, investors can gain access to a fixed returns while becoming a part of the entrepreneurial journey of businesses of their choice.
MoolahSense – Asia’s First Crowd-Finance Player
Founded by Lawrence Yong and Chung Wei Tuck – bankers with 25 years of combined experience in private and investment banking – MoolahSense is one of Asia’s first crowd-financing platform. This web-based crowdfunding platform does two things:
1) Allow businesses to borrow money directly from individual investors, ie crowd-financing;
2) Allow people to invest directly in businesses for a fixed return, ie crowd-investing.
Businesses seeking to raise funds can do so via the following steps:
- Submit a request via MoolahSense’s platform;
- Decide the amount (S$100,000 to S$300,000);
- Specify the target interest rate for their loan;
- Use videos, photos, text, slides and other aids to tell their story; and
- Provide financial and other information to build trust.
To qualify for crowd-financing, all businesses need to be reviewed by MoolahSense before they are listed. Each business is identity checked. Only those with at least one year of audited financial statements or two years of trading history can list. Their net worth should also not be negative.
Crowd investors will then select who they wish to invest in by submitting note subscription offers. These offers start from tranches of S$1,000 and above. Investors who wish to do so can spread their risks across multiple businesses.
To reduce risks for investors, MoolahSense manages monthly repayments from the businesses to the investors. When payments are missed, MoolahSense has a 3-stage process to recover monies from the issuer. This may include professional third party debt collectors and legal solutions.
Watch the video below to get a better idea of how MoolahSense works:
MoolahSense’s First Campaign Over 207% Subscribed
MoolahSense’s first crowd-financing campaign with boutique education centre Smaths Consulting enjoyed much success. With 44 unique investors, the funding campaign was 207% over-subscribed, raising S$207,000 from 44 individual investors over a one-month campaign period.
According to MoolahSense, the targeted amount of S$100,000 was reached within 20 days. A final interest rate of 9.9% was set for the 19 successful investors. Investment amounts start from $$1,000, with the most popular being $3,000 and the highest at $30,000.
Ian Gan, CEO of Smaths Consulting, commented that “the benefits we have seen extend beyond just money. We have received validation on our business model, forged new partnerships with our funders, and seen a boost in our brand image.” Looks like the platform is off to a sterling start.
Q&A with MoolahSense CEO Lawrence Yong
Hot on the success of its first campaign, I interviewed MoolahSense CEO Lawrence Yong to find out what inspired he and his partner to start Singapore’s first crowd-financing business.
1) What inspired you and your partner to start MoolahSense? Any particular trigger?
I have been a practitioner in the financial sector for the past 12 years, with experiences spanning private wealth management and investment banking. During the financial crisis of 2008, I noted how there seem to be a bias towards larger companies when it comes to financing. As a banker, I also observed how everyday investors have limited access to investment choices compared to accredited investors (ie high net worth investors).
This led me to question how optimal our financial systems are in meeting the broad needs and wants of its members. After the crisis, the disproportionate allocation of capital to large firms was often done at the expense of small firms. Heightened levels of investor protection – a necessary reaction to control the problems that contributed to the crisis – also meant that the already limited investment opportunities for everyday investors were further restricted.
One evening in 2012, I was in the dealing room working on a client order, awaiting New York to open. To pass time, I googled and stumbled upon the phenomenon of peer-to-peer lending. I was immediately drawn to the way it leverages community and technology to resolve the challenges of capital allocation.
Peer-to-peer lending is a win-win solution for both borrowers and lenders as they are empowered with greater access and opportunities through the platform. These platforms have become established in the US and the UK, and are growing rapidly. The natural question that followed was if it would be relevant to Singapore’s context and our research and business activity show that it is.
2) How does MoolahSense differ from traditional SME financing channels (eg banks)?
MoolahSense is an online platform that empowers citizens to stimulate economic growth by providing finance directly to growth businesses, in exchange for an attractive rate of interest. Currently the only fully compliant Peer to Peer Business Lending platform in Singapore, MoolahSense complements the existing financing landscape.
Our main distinction comes from providing a new source of financing for SMEs. We empower SMEs to activate their social networks (friends, relatives, customers, associates, employees, suppliers etc) to monetize their “social collateral” (reputation, brand equity etc). This allows for broader participation by both business borrowers and everyday investors to their mutual benefit. Indeed, some people have termed crowdfunding as the “democratization of finance”.
3) In the market right now, there are many business incubators and accelerators. How does MoolahSense differ from these start-up service providers?
MoolahSense is quite different from incubators and accelerators.
As an online marketplace, we provide the infrastructure to connect businesses seeking short term loan financing to prospective investors. Prior to admission on MoolahSense, we curate each business by conducting background checks, examining their financials and having face to face interviews with the business owners. When the business pass our criteria, they are admitted to the platform. They then construct their online profile, complete with information disclosures before posting a funding request.
Each funding request consists of the amount of funds required, proposed target interest rate, as well as where it goes to. We make it mandatory for businesses to disclose summarised financial information to prospective investors. Borrowers are also encouraged to share “softer” information such as their social media footprint, achievements, or industry accreditation and memberships in order to be transparent and built trust.
Prospective investors then review the profile of the business and make their own independent decision of whether to participate or not. At the end of the auction period, the business then decides whether to accept the offers and the system will prioritise allocation to the lowest interest rate offers.
When the offers are allocated, a note contract will be generated, specifying the agreed terms and contracting parties. During the life of the note, MoolahSense manages the collection, disbursement and recovery of payments.
Incubators and accelerators can be our valuable partners in growing this bottom-up grassroots driven mode of financing.
4) How does financing one’s business using crowdfinance differ from securing investments from venture capital funds or business angels?
To answer this question, first of all, I think it is necessary to distinguish the 2 main forms of crowdinvesting: (1) equity based and (2) loan based.
VCs and angels are typically equity investors, with expectations of multi-fold returns. They require multi-fold returns as the nature of equity is such that there is no certainty or visibility of returns until there is interest from another buyer at some point with a higher valuation. This necessarily means that VCs and angels look out for businesses with immense growth potential, which would tend to be tech-focused. There are some commentators who have noted possible tensions between VCs and angels versus equity-based crowdinvesting.
Loan-based crowdinvesting is however quite different. Generally, this would not be in conflict with VCs or angels, due to its capped interest returns. P2P lending is also more inclusive as it allows companies from different industries to participate. These companies need not necessarily be tech-centric nor exhibit the potential for multi-fold returns. However, they need to demonstrate the capacity and willingness to repay. Investors on crowdinvesting platforms like MoolahSense are likely to be everyday or institutional investors who desire an attractive fixed income yield, benchmarked against beating inflation.
5) For investors, what would be the commitment like for them? How would investing in such P2P notes be superior to say investing in mutual funds/unit trusts, shares or bonds?
The minimum investment to participate in a note offer starts from S$1,000. I don’t think one can conclude the superiority of one asset class over another. It is ultimately a function of risk appetite that differs from an individual to another.
The structure of a P2P note is that it has a definite one-year maturity, with twelve periodic principal and interest repayments that are agreed upon during the auction. The repayment structure resembles a typical mortgage or car loan such that the last repayment at maturity fully redeems the note.
The key risks are on the business’ capacity and willingness to repay. So, in this regard, it is similar to a bond. There are however limited retail bond opportunities for the majority of Singaporeans as most bonds are offered at a minimum piece of S$250,000.
6) Who would you see as a likely borrower for MoolahSense? Likewise, who do you see as a potential lender/funder?
Crowdinvesting is all about democratization and community participation.
As such, we encourage Singapore businesses of all shapes, sizes and industry sectors to consider tapping into broad based funding sources through the MoolahSense platform.
Borrowers are likely to have at least one year trading record, some customer validation, and must not have negative equity. Beyond that, they could encompass businesses from one year old to fifty, drawn from Education, F&B, Retail, B2B, Technology and many other sectors.
Most importantly, borrowers must have a compelling business story to tell. One that will resonate with investors, and through their keeping of promises, build bonds of trust and confidence. Companies with strong networks of supporters, especially on social media, will have higher chances of success in funding via MoolahSense.
With respect to potential investors, they could be drawn from all walks of life. They are likely to be financially and business literate and keen to seek opportunities for fixed returns that can beat inflation. Individual investments in any one company start from S$1,000 and up.
7) What is your long term vision for MoolahSense? Where do you see the business headed in the future?
MoolahSense has a mission to tackle market failures and address unserved customer needs in the broad landscape of finance.
Today, we can make our biggest initial positive impact in Singapore by solving financing issues for local businesses and helping individual investors on the path to more decent returns that meet their objectives. In so doing, we aim to foster an entrepreneurial culture that is aligned and supportive to our broader national narrative of creating quality jobs.
Beyond Peer to Peer Business Lending, there are many others segments of the industry that remain unserved or inadequately served. We have those in our sights for future builds to our model.