P2P lending tuition fees

I’ve mentioned previously that I had some money on the crowdlending site MoolahSense. Not very significant, but still a sum of money. I had hoped to peacefully experience the platform, learn the ins and outs and most importantly, get my money back.

One thing I’ve learnt through my career is that – Life never goes as planned.

Stressed Campaign

Welp, time to write off my Moolah

Of my initial investment of $2,000, I received $733.44 of repayments. If I were to write off the balance of the loan, that would represent a 63.3% loss.

So what can we learn from my $1.3k of tuition fees?

1) Never be greedy about yield

Most people look at the 18% headline rate and go crazy.

Huat ah

18% Return! Pump all my money in!

As investors in Hyflux 6% Perps found out, people can promise to pay you high yields, but there is always a reason for the yields. There is always the risk of going to zero.

2) Check your Risk N Returns before investing

Adding on to point 1, let’s analyse the numbers of the campaign I invested in: 12 months equal installment 18% loans. This is a very common structure on the MoolahSense platform.

  • Total Capital: $2,000
  • Total interest received if no default: $200.32
  • Nominal return: About 10%

This campaign was initiated during a time when MoolahSense had no servicing fees. Now, there’s a 1% fee on repayments, which will drive return below 10%.

Now think about it, would you risk all your money for a meagre less than 10% return?

I would argue no it is insufficient, dang I could earn that percentage on a average year in the market at a much lower risk! You should be demanding 20% return for it to be worth it (maybe?)

3) Diversification is important

When I was looking at campaigns to invest in, I could have put $1k into 2 campaigns instead of $2k into a single campaign to diversify a tiny bit. If I had done that and not been lazy as I was then, I could have saved 1 grand.

Also, thankfully, I didn’t put all my money into MoolahSense so the loss represents only about 1% of my portfolio.

Conclusion

As I’ve mentioned in my earlier post, I’ll be gradually withdrawing from the platform as  my other campaigns wind down as the Risk N Returns are simply not enticing to me. Tread carefully with Crowdlending, my friends.

Happy Hunting,
KK

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Crowdlending – is it worth it?

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?

Crowdfunding Diagram

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:

  1. Investors
    1. Provide loans to companies for a high interest yield
  2. Crowdlending platforms
    1. Match businesses to individual investors seeking to invest through a online platform, basically a facilitator role for the transaction.
    2. 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)
  3. Businesses
    1. Obtain debt financing which is cheaper than bank loan rate or when they are refused bank loans.
    2. 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

Pros:

  1. Higher yield on investments.
    1. Typical unsecured loans command a interest of about 13 – 15% p.a.
    2. Secured loans command a interest of about 7 – 8% p.a.
    3. Above figures based on MoolahSense.
  2. Relatively low barrier to entry.
    1. MoolahSense allows investments as low as $100.
  3. Hassle-free
    1. MoolahSense has a Auto Allocation service that automatically puts your money to work based on a set criteria investors set.
  4. Diversification
    1. Alternative investment as part of a wider portfolio.

Cons:

  1. High risk of default
    1. Companies who need to seek Crowdlending generally have no or poor track record
    2. There’s a reason why banks don’t approve their loans
    3. MoolahSense has a approximate default rate of 4% of issuers.
  2. Not liquid
    1. Unlike bonds, you are not able to retrieve your loan proceeds until maturity.
  3. Platform risk
    1. 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:

  1. Check what the company intends to do with your money
    1. 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.
  2. Check the industry the company is in
    1. I generally avoid consumer products and F&B companies as these are notoriously fickle industries.
  3. Check the financials of the company
    1. For the P&L statement, look at the gross profit and net profit figures.
    2. For the balance sheet, look at debt to equity levels, cash levels, current ratio and operating cashflow.
    3. 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
    4. 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
  4. Check if the company is a repeat issuer
    1. If a company has run more than 1 funding campaign on the platform, it is likely to be more trustworthy.
  5. Consider spreading your money across many companies
    1. Spreading your money across many companies spreads the corresponding default risk, reducing the impact of a single default

Going forward…

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.

Happy Hunting,
KK