May 4, 2015

Every few months, the banker would give me a call with regard to my little company which I had set up for my website and asked if I wanted a loan. And every few months, I would say I am interested just to keep their hopes up until it comes to the question of profitability and since I have not been able to show any profits, they would politely try to worm their way out of their offer with the suggestion that they “keep in touch”.

Yes, it is that difficult to get a loan for a small start up in Singapore and even harder if you are not in tech-space which has several new initiatives such as startupbootcamps spearheaded by the various government agencies.

What happens if you want to open a prata shop? (And I happen to think prata is a decent career option these days, have you seen prata prices lately?)

I am not sure if people remember the centuries old concept of a tontine where a bunch of housewives or friends would contribute to a monthly pool and the monies awarded to the highest bidder, on loan etc. Or at least that is the very vague impression I had of it before it was outlawed by the government given the high incidence of defaults and frauds that was not legally enforceable.

Such a scheme is what modern times would deem an illegal collective investment scheme where prata shop start-ups could have got their funds quick and easy then.

Enter the new age of Bitcoins, payday lenders, lending clubs and people monetising themselves online with professional footballers are IPO-ing themselves for 4 mio for installments of 10% of earnings for 10 years and college grads can IPO themselves for  USD 70k for installment payments of  6.94% of their earnings over 10 years.

The Lending Club IPO (LC US) last year is perfect testimony. An online financial community that brings together credit worthy borrowers and independent investors for their mutual benefits, serving retail investors and borrowers in the United States. Since then, they have tied up with Alibaba and Citibank.

All perfectly legal and well honed to fit into the financial system that it has caught many regulators off guard as it gains momentum in the shadow banking** avalanche that has caught the world, not that it has not been happening all this while, for I know many friends involved in the private loan business for securities, commodity financing and more.

** to be precise, shadow banking refers to anything that is outside the ambit of regulatory oversight which puts many a hedge, pension or mutual fund activity within its borders

You see, investors are constitutionally free to deploy their monies where they want within the bounds of legality as loan sharks turn proper money lenders with proper loan documents these days.

What is the difference between giving personal loan and buying a bond? Or what is the difference between a venture capital investment and crowd funding a new cafe?

The difference is that small money can do it now and we do not need millions to do so. And prata shops or people like myself can access a source of funds for our small businesses that was previously harder to access.

A mindset change revolution has taken root such that MAS released a consultation paper earlier this year to address the specific area of securities based crowdfunding i.e. loans/debentures or equity, to accredited and institutional investors, leaving the retail investor in the grey.

Being a former bond trader, I am sold on the idea of the investment alternative these opportunities present despite all the negative publicity that land-banking firms like Dolphin Capital has garnered in mainstream media.

If we properly evaluate the risks of the investments and their returns, some of us may find the case to bolster portfolio returns with these avenues that was only available to the private equity chaps and hedge funds in the past.

I am not suggesting the exponential returns of investing in the equity of the next Facebook but rather fixed income streams from hair salons and prata shops, the real bread and butter businesses, with a decent chance of success, creating a win-win situation for both parties. 1-2% per month for the investor and a loan that does not strangulate the business owner.

My research on the crowd equity and loan market has led me to find the following.

  • the personal loan market is still dominated by licensed money lenders.
  • there is a growing market for SME loans ranging from $50-500k available for investors, paying a return of 10-13% p.a. in monthly arrears for tenors of between 1-3 years.
  • investment quantum is in the range of $5-50k although some investors top up to $200k for the companies that they are comfortable with.
  • documentation is detailed for most cases with most loans backed by personal guarantees from the business owners.
  • most of the facilitators tie up with a credit bureau such as DP Credit Bureau for their credit due diligence on their borrowers.
  • equity crowdfunding has not taken off as quickly because there are enough venture capitalists around to sniff out all the good deals, in Singapore at least.
  • the alternatives for seasoned businesses would be private capital providers taking on letters of guarantees and invoices.

What to watch out for.

  • the funds should preferably be deposited in an escrow account, beyond the reach of the intermediary as it creates an additional layer of risk.
  • the risk of default should be deemed higher (or banks would be knocking on their doors) and my strategy is to spread the risk over a few loans instead of putting all my eggs in one basket.
  • a legal opinion should be sought when necessary on the loan documentation to ensure first-lien status, if it is not provided.
  • there is no backing out of a loan once it has been disbursed because there is no secondary market pricing unlike some of the listed bonds we buy, (note that there are many SGD bonds without secondary market levels as well).
  • there is also no comparable which is frustrating as the investor will not know if they are getting a good deal at 10% or 12% though I daresay we shall accumulate a database of transactions over time that will give us better transparency.

I have an idiosyncratic idea that most of the new loans should be relatively high quality ones at the moment. This stems from the reason that for all manners of new businesses, the intermediaries would not want to be seen screwing up and tarnishing goodwill. It is baseless, of course.

Yet, if we examine research on microfinance in rural India shows that default rates are actually very low despite the higher interest rates charged (and also that women made better debtors than men).

The key is to successfully integrate these new investments within the main portfolio and my strategy would be likened them to high yield corporate bonds – instead of buying a US100k bond issued by a coal mine in Timbuktu, I could potentially lend $10k to a bunch of prata shops in Singapore etc. From a risk perspective, most rational investors would not allocate 100% of their portfolio to those high yielding stuff anyway.

In doing my homework, I found several crowdfunding and crowdlending sites in Singapore and most of them are happy to entertain enquiries besides running workshops to explain about what they do. [do note that MAS has a strict rule on advertising at the moment which means they are not allowed to post too much on their websites.

Crowdonomic – an Asian crowdfunding platform

Crowdtivate – a Starhub venture for Asian entrepreneurs

CoAssets – real estate and equity crowdfunding platform

Capital Match – an online crowdlending company for local SMEs

Moolahsense – an online crowdlending company for local SMEs

In conclusion, I confess I did a spot of crowd donation last year for my website that can only be described as disappointing. Perhaps the crowd is too nascent or perhaps the market is profit driven, but I shall embrace the empowerment of the crowd as a step towards social and economic progress.