I have a confession to make. I have some money invested on the crowdlending platform MoolahSense which I have not disclosed in my investment portfolio, mainly due to difficulty in reporting investment value on a monthly basis. I’ve been on the platform for about 5 months now for my own personal education and for higher yields. The past 5 months has allowed me to form an opinion on MoolahSense and Crowdlending in general, which I will share today.
What is Crowdlending?
Crowdlending is essentially individual investors providing debt financing to companies. As shown in the diagram above, there are 3 parties involved in the process – the investor, the crowdlending platform and the companies requiring financing. The motivations of each party are set out below:
- Provide loans to companies for a high interest yield
- Crowdlending platforms
- Match businesses to individual investors seeking to invest through a online platform, basically a facilitator role for the transaction.
- Provide debt recovery and account management services to individual investors for a fee. Fees range from 15-20% of interest repayment (Funding Societies and Capital Match) to 1% of each total repayment (principal + interest) (MoolahSense)
- Obtain debt financing which is cheaper than bank loan rate or when they are refused bank loans.
- Obtain invoice factoring to improve cashflow.
Types of Financing
There are generally 2 types of financing – Secured and Unsecured financing.
Secured financing means that loans are backed by collateral. This means that in the event of a default, lenders have a right to seize a specific asset as a way to recover the owed amounts. Collateral can be in many forms, common ones include factory building, land, inventories or receivables. Invoice financing is a form of secured financing.
This is contrasted against unsecured financing, which essentially means there’s no collateral. As unsecured financing is more risky, these loans command a higher interest rate as a result.
Pros and Cons of Crowdlending
- Higher yield on investments.
- Typical unsecured loans command a interest of about 13 – 15% p.a.
- Secured loans command a interest of about 7 – 8% p.a.
- Above figures based on MoolahSense.
- Relatively low barrier to entry.
- MoolahSense allows investments as low as $100.
- MoolahSense has a Auto Allocation service that automatically puts your money to work based on a set criteria investors set.
- Alternative investment as part of a wider portfolio.
- High risk of default
- Companies who need to seek Crowdlending generally have no or poor track record
- There’s a reason why banks don’t approve their loans
- MoolahSense has a approximate default rate of 4% of issuers.
- Not liquid
- Unlike bonds, you are not able to retrieve your loan proceeds until maturity.
- Platform risk
- If the platform you are on shuts down, recover of loans from companies may become troublesome.
So is Crowdlending for you?
Well the short answer is – it depends. The main question you should ask yourself is “What is your risk appetite?” Are you willing to invest in a risky asset for 13-15% yield? How much of your portfolio are you willing to risk in search of higher yield?
Personally, I’ve been thinking about this for some time now and my personal thought is actually no. I feel I’m taking way too much risk for a relatively meager (my own opinion) return. Secured financing may mitigate the risk but 7-8% return is honestly not very attractive to me. Also, the non-liquid nature of the loan only makes it even more risky in my eyes.
That being said, I do see a place for this as part of a wider portfolio for another investor.
Things to note when choosing a company to fund
So you decided to invest in Crowdlending. Here are some pointers to look out for:
- Check what the company intends to do with your money
- I’m more willing to fund companies who need the money to fund purchase orders from customers as this indicates customer demand for their services.
- Check the industry the company is in
- I generally avoid consumer products and F&B companies as these are notoriously fickle industries.
- Check the financials of the company
- For the P&L statement, look at the gross profit and net profit figures.
- For the balance sheet, look at debt to equity levels, cash levels, current ratio and operating cashflow.
- Current ratio compares current assets to current liabilities, with a ratio > 1 indicating the company has more liquid assets than its immediate liabilities, thus it is more likely to be able to service your loan
- Positive operating cashflow indicates continuing operations is able to generate cash on its own, thus making it more likely for the company to pay your loan
- Check if the company is a repeat issuer
- If a company has run more than 1 funding campaign on the platform, it is likely to be more trustworthy.
- Consider spreading your money across many companies
- Spreading your money across many companies spreads the corresponding default risk, reducing the impact of a single default
Crowdfunding is a risky investment that can play a part in your portfolio. However, based on my thoughts above, I’ll be slowly withdrawing my funds from the platform as my loans mature and reallocate the funds elsewhere.