“Tua Pek, what do you do for a living?” my 7-year old niece asked me during our family’s Chinese New Year holidays in Vietnam recently. I murmured something along the lines of helping companies borrow money.
“But how?” she followed up. Kids!!! They and their “why” and “how” questions. But as the weeks and months rolled by, I continued to give her questions more thought and how I can answer all these follow-on questions in the simplest manner.
Most of us would have experience “crowdfunding” in some form or other in our lives – mainly when we were younger. I recall the times when I went around my neighbourhood during my student days canvassing for donations for causes such as a school project or for the Blind Centre. It was hard work, walking tens of miles and knocking on doors. Little did I know then but it was “crowdfunding” at its very basic level. These days, crowdfunding is “in” because of technology where on the click of a button allows one to communicate with lots and lots of people. It has made sourcing money from the public, aka the crowd, much easier. As they say, money makes the world go round and the power of harnessing the crowd to come together to finance something that each one of them believes is a powerful driving force.
Crowdfunding, as we know it today, is a very general term that is used to refer to initiatives that involve the raising of money from the crowd. For example, it could be in the form of donations for a charity or for a good cause to help someone or a group of people in need at that particular point in time. Or it could be to raise financing to develop a product. Or to sell shares in one’s company to raise capital. Or to borrow money to fuel one’s business growth.
If you search online, one of the main definitions of crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet. The internet has made the world a much smaller place and hence, it is the simplest way of sourcing money from the public.
Crowdfunding started entering the consciousness of the Singapore public over the last couple of years. This is especially so in the loan or equity crowdfunding space. Since June 2016, anyone who allow companies to source financing from the public on their platform has to be licenced by the Monetary Authority of Singapore (“MAS”). This is a good development as certain safeguards have been put in place to protect the investors as well as borrowers. For example, the people that operate the platform has to be considered fit and proper by the MAS and that investors are informed of the risks and pitfalls of investing through such a channel.
When investing through a peer to business lending platform, for instance, you should take into account how the loans have been analysed, what factors may negatively impact the cash flow of the business and the capability of the borrowers’ management. But before all these questions, the first question you should ask yourself is “who are behind the platform, how and what they have done to get themselves comfortable with the loans that are posted on their platform?” As investors, we need to turn back the clock and be a kid again asking the simple questions of “why”, “how” and “what”. Is investing through such channels risky? It can be, but not necessarily so if you ask the right questions and diversify your investment portfolio.
At Minterest, we always ask ourselves this question after analysing various aspects of our borrowers’ business – “would we put our own money into this loan?” If the answer is yes, the loan will be posted on the Minterest platform for our investors to invest in. We believe in building relationships with our borrowers and investors that last so that both can meet their long term financial goals – that is why we are careful (or is it “choosy”?) on what loans can be posted on the Minterest platform.
I hope now you have a slightly better understanding of what crowdfunding is. Investing through such a channel need not necessarily be risky if we become like a kid again asking the “right” questions and remember to apply the diversification strategy.
Till the next time, may your investment journey be a profitable one!