Local Crowdfunding investment in SME

[Caelitus]

If we do a decision tree with the highest default rate (as computed by the funding platform) and compare that with the alternative of leaving your money in say OCBC 360, the interest rate required to compensate one to offer funds to them should be higher. It is far easy for a layman to be seduced by the rates bandied around.

Next, if I am not wrong, one has to declare income received from such lending activities for income tax.

IIRC, bank interest is also subjected to income tax. The only exception is POSB.

I don't quite understand the first paragraph. I reckon, diversification is a necessity to participate the crowdfunding. Concentrated approach is never right IMO.

For example, if a company was issuing a note for 6 months and the P2P platform has assessed the probability of default to be between 4 to 5.075%, that means the probability of repayment is 94.925%. Assume the borrower was dangling 18% p.a. interest, should we bite? Many people instinctively would.

If we take 2.25% p.a. offered by OCBC 360, the quick view is that without taking up the note, you would have an expected value of $1,011.25 at the end of the 6 months. The expected value for 'investing' in that note needs to account for the probability of default. Hence the expected value is $941.16 which is lesser. With no change in the offered rate, one should not take it up.

Therefore, if we work backwards, we can compute the rate which will swing the decision. That is when the expected value of a yes decision exceeds the expected value of a no decision. That will be at 23.756% which just nudges it higher than the bank's returns.

It is advised to do the due diligence and run the rule over the industry the borrower is in, the use of the borrowed monies, background etc. As many members have pointed out in other threads, there is no sure-to-win investment. Some say the chance of a default is so remote, sure-to-win. Even if there is a problem, recourse can be sought from the P2P companies. Sounds familiar?

[Image: 30k6o2e.jpg]

[specuvestor]

If we do a decision tree with the highest default rate (as computed by the funding platform) and compare that with the alternative of leaving your money in say OCBC 360, the interest rate required to compensate one to offer funds to them should be higher. It is far easy for a layman to be seduced by the rates bandied around.

Next, if I am not wrong, one has to declare income received from such lending activities for income tax.

IIRC, bank interest is also subjected to income tax. The only exception is POSB.

I don't quite understand the first paragraph. I reckon, diversification is a necessity to participate the crowdfunding. Concentrated approach is never right IMO.

bank interest has not been taxable for personal income tax purpose for at least 10 years already

https://www.iras.gov.sg/IRASHome/Individ.../Interest/

Technically crowdfunding income should be taxable but I reckon that's the least of one's analysis

Concentrated approach makes sense if you know what you are doing

[CityFarmer]

If we do a decision tree with the highest default rate (as computed by the funding platform) and compare that with the alternative of leaving your money in say OCBC 360, the interest rate required to compensate one to offer funds to them should be higher. It is far easy for a layman to be seduced by the rates bandied around.

Next, if I am not wrong, one has to declare income received from such lending activities for income tax.

IIRC, bank interest is also subjected to income tax. The only exception is POSB.

I don't quite understand the first paragraph. I reckon, diversification is a necessity to participate the crowdfunding. Concentrated approach is never right IMO.

bank interest has not been taxable for personal income tax purpose for at least 10 years already

https://www.iras.gov.sg/IRASHome/Individ.../Interest/

Technically crowdfunding income should be taxable but I reckon that's the least of one's analysis

Concentrated approach makes sense if you know what you are doing

Thank you to enlighten. Yes, I am wrong in the assumption. Learn a new thing today.

[koh_52]

Aiyo crowd funding is the modified version of 'ton-tin chit fund model' of which long ago been started by China and cases of the founder run away with the money.

For MoolahSense, you bit for the interest rate, the lower u bit the better chance u get it, if its a popular company wanted to borrow money, like the recent a Mobile scooter company closed at 13% p.a.

But usually not popular company the allocation is 'first-come-first served' basis like the coming a manufacturer of elastomer seals. Target to loan 200k, offering 19% p.a. on 12 mths equal installment.

You may apply to be their member, go into their website and you will notice some companies (e.g. a mobile related co) every month loans 150k - 200k from this scheme and becos of the lucrative commission (3k -5k) per application they will just approve it and pass the risk to the greedy investors.
Take upfront money return interest to investors, like using many credit cards scenario.

To me, its a 'Ponzi' scheme, capitalize on human weakness that is 'greedy' wow 19% p.a where on earth u can find this return.

The borrowers will keep on coming to this place to take easy money, one day if you don't approve my loan , I no money pay you and I will default...run road or declare bankrupt.

As for China case, the founder using 'Gemini Chit Fund' method, create all the fictitious hollow companies all money go to actually one person, then run-road.

Well, its only my personal opinion.

[CityFarmer]

For example, if a company was issuing a note for 6 months and the P2P platform has assessed the probability of default to be between 4 to 5.075%, that means the probability of repayment is 94.925%. Assume the borrower was dangling 18% p.a. interest, should we bite? Many people instinctively would.

If we take 2.25% p.a. offered by OCBC 360, the quick view is that without taking up the note, you would have an expected value of $1,011.25 at the end of the 6 months. The expected value for 'investing' in that note needs to account for the probability of default. Hence the expected value is $941.16 which is lesser. With no change in the offered rate, one should not take it up.

Therefore, if we work backwards, we can compute the rate which will swing the decision. That is when the expected value of a yes decision exceeds the expected value of a no decision. That will be at 23.756% which just nudges it higher than the bank's returns.

It is advised to do the due diligence and run the rule over the industry the borrower is in, the use of the borrowed monies, background etc. As many members have pointed out in other threads, there is no sure-to-win investment. Some say the chance of a default is so remote, sure-to-win. Even if there is a problem, recourse can be sought from the P2P companies. Sounds familiar?

[Image: 30k6o2e.jpg]

I understood the working, but will it pass the reality test?

OCBC most recent net interest margin is 1.66%, and NPL is 0.9%. Based on similar model, the return to loan, is $(1007.4-9.1) which is less than original normalized $1000 loan. The conclusion from the model, is OCBC shouldn't give any loan, since the risk-reward is unfavorable, with NPL of "ONLY" 0.9%. I reckon, it must be some unrealistic assumption(s) in the model, which make it inapplicable, even in this simple case.

Does it make sense?  

[Clement]

The model seems off.

Using Cityfarmer's example, in event of payment, the bank will receive a total of $1,016.60 at the end of the year and $0 in the event of default. Expected wealth is therefore $1,007.4 if the loan is made. This exceeds the original $1,000 invested in making the loan.

Using Caelitus example will result in expected wealth of $991.92 which will not change his conclusions. (Not sure how the no default payoff of $1,044.95 was computed, seems lower than 18% annual interest over 6 months would imply.)

[Raks]

I am interested in the crowd funding thing but unfortunately there isn't too much regulations on it. But then we can't have the cake and eat it too:- if crowd funding is well regulated as listed companies there will probably be charges/fees that will make crowd funding irrelevant to the small companies.

But then, we are not any safer trading in SGX. See iX Biopharma. Basically getting the risk/reward of being a start-up investor, but not getting any stapled sweeteners such as non dilutive, preference share, convertibles, warrants, options... So why not go crowd funding.

The pros:
1. You know the money that you give to them, whether as a debtor or investor, goes into the business. It's a primary market, not buying/selling between share-holders.
2. Illiquid. Just give them the money. You can choose to worry and feel like divesting, but you cant. Lol.
3. The return is usually higher. For debt, you can sometimes find something close to the bank unsecured interest rate (beware: there're good reasons why, I suppose). For equity, a multi-bagger but maybe after few years.

The cons:
1. In the beginning, there's debt and there's equity. And then someone says, let's have all those in-betweens, hybrids, and all sorts of flavors in debt and equity. Some times you don't need the accuracy of an actuary to know that in terms of present value, you are not well compensated for the risk. It could be a small company, but they can still do fancy financial engineering.
2. Fine prints. Debt has seniority over equity so it should be safe yes? Wait. There's so many debts and even debts have different seniority.
3. Illiquid. You could still sell to someone else. But not like listed securities.
4. Risk of no return. Illiquid. Losing it all is possible.
5. Opportunity cost. I understood from a more seasoned investor that, in start up it's not necessary 10x, 100x return when it goes IPO or bought by Google/Facebook; or lose it all. Sometimes the business could be bought by another business. You get back what you put in plus maybe a little extra. For those years, you could have done better by doing dollar-cost averaging sti.
6. You might no longer want anything to do with IPO. 

In pre-IPO, I never have the guts to take the concentrated approach. 
One of my investments that is not certified dead sell equity to pay the preference share holder and bills, years after series c funding. Not exactly lying when they tell the new investors that the company has zero debt. I am glad that what I have is non dilutive, but it still sound like ponzi scheme. Seriously, I could be in one, or more  .

[Caelitus]

The model seems off.

Using Cityfarmer's example, in event of payment, the bank will receive a total of $1,016.60 at the end of the year and $0 in the event of default. Expected wealth is therefore $1,007.4 if the loan is made. This exceeds the original $1,000 invested in making the loan.

Using Caelitus example will result in expected wealth of $991.92 which will not change his conclusions. (Not sure how the no default payoff of $1,044.95 was computed, seems lower than 18% annual interest over 6 months would imply.)

Clement, thanks for pointing it out. The example I uploaded was based on a 8.99% p.a. offer. Correspondingly, my post should be edited to read that the breakeven offer should be 12.4%. My apologies.

[specuvestor]

If we do a decision tree with the highest default rate (as computed by the funding platform) and compare that with the alternative of leaving your money in say OCBC 360, the interest rate required to compensate one to offer funds to them should be higher. It is far easy for a layman to be seduced by the rates bandied around.

Next, if I am not wrong, one has to declare income received from such lending activities for income tax.

IIRC, bank interest is also subjected to income tax. The only exception is POSB.

I don't quite understand the first paragraph. I reckon, diversification is a necessity to participate the crowdfunding. Concentrated approach is never right IMO.

bank interest has not been taxable for personal income tax purpose for at least 10 years already

https://www.iras.gov.sg/IRASHome/Individ.../Interest/

Technically crowdfunding income should be taxable but I reckon that's the least of one's analysis

Concentrated approach makes sense if you know what you are doing

Thank you to enlighten. Yes, I am wrong in the assumption. Learn a new thing today.  

CF u too big time to notice tax on interest it was changed around the time section 44 franking of dividend was abolished

On another note the fallacy on the banking mathematical model is that default does not mean zero payout.

Aiyo crowd funding is the modified version of 'ton-tin chit fund model' of which long ago been started by China and cases of the founder run away with the money.

For MoolahSense, you bit for the interest rate, the lower u bit the better chance u get it, if its a popular company wanted to borrow money, like the recent a Mobile scooter company closed at 13% p.a.

But usually not popular company the allocation is 'first-come-first served' basis like the coming a manufacturer of elastomer seals. Target to loan 200k, offering 19% p.a. on 12 mths equal installment.

You may apply to be their member, go into their website and you will notice some companies (e.g. a mobile related co) every month loans 150k - 200k from this scheme and becos of the lucrative commission (3k -5k) per application they will just approve it and pass the risk to the greedy investors.
Take upfront money return interest to investors, like using many credit cards scenario.

To me, its a 'Ponzi' scheme, capitalize on human weakness that is 'greedy' wow 19% p.a where on earth u can find this return.

The borrowers will keep on coming to this place to take easy money, one day if you don't approve my loan , I no money pay you and I will default...run road or declare bankrupt.

As for China case, the founder using 'Gemini Chit Fund' method, create all the fictitious hollow companies all money go to actually one person, then run-road.

Well, its only my personal opinion.

Actually the tontine structure is a discounted loan upfront which reduces counterparty risk. In addition the people in the structure knows almost every one through grapevine.

These are not evident in crowdfunding. Counterparty risk is too high unless borrower has physical asset collateral else my sense is crowd funding is doomed as an investment product except for social non profit ventures

I'm actually wondering if this crowdfunding thing falls under the Chits Fund Act ie tontine or can we revive the tontine structure?

[CY09]

1) For the past 3 days, 3 fundraising campaigns were subscribed within 16 hours after they were open. Their mentioned ROI were all above 10%; but reported balance sheet were not great. It makes Noble, ezra balance sheet look great

2) "But usually not popular company the allocation is 'first-come-first served' basis like the coming a manufacturer of elastomer seals. Target to loan 200k, offering 19% p.a. on 12 mths equal installment."

The above mentioned crowd funding was completed in 20 minutes. Talk about being unpopular!

3) Given the observations of these campaigns filling up so quickly, it is quite evident many investors are now hungry for products with returns and perhaps are ignoring the risk. However, given the rather good track record of companies on these platforms in paying back the debts, it means two possibilities: 1) These platforms do do their due diligence before allowing the note listing or 2) it is a well run ponzi scheme. And unlike last year, when I had the luxury of thoroughly analyzing the companies before investing; I do not have such luxury now and have to make quick decisions. Its becoming hard to do thorough investing on these platforms