From being perceived as a “Ponzi scheme” to being labelled as “unlicensed money-lenders”, Wong Kah Meng, CEO and Co-Founder of Funding Societies Malaysia, takes us on a journey to explore the newly emerged world of peer-to-peer lending as we indulge deeper into understanding the purpose and mechanics of this method of financing.
How does this all work?
Funding Societies, simply put, is an online platform for small and medium-sized enterprises (SMEs) to get financing from individuals and institutional investors. It is a platform that facilitates a very clear and transparent model whereby money is used to support SMEs and when the SMEs can generate a profit on the use of those funds, part of the profit is used to repay investors as part of principal and interest.
The SME Perspective
When SMEs intend to expand and grow their business or to meet a particular customer’s order, this creates a financing need. This need can then be tackled through various financing means, one of which includes peer-to-peer financing; the service offered by Funding Societies. To get started, essentially, the SME can approach Funding Societies through their website or mobile app, fill in basic information on the financial background of the company and wait for a credit assessment to be conducted by the company. This credit assessment aims to understand the nature of the SME’s business, and to get enlightened on where the financing need stems from. This way, Funding Societies can gauge the sustainability of the SMEs aim. It also allows them to review the credit-worthiness of the SMEs and the ability of the enterprise to make payments on time. Once the team from Funding Societies is comfortable with all this information that has been collected, the SME’s loan will be made available online for crowdfunding.
The Investor Perspective
From an investor perspective, once you sign up for the mobile app and pass through the “Know Your Customer” checks, you can then can view these investment opportunities that have been brought up by the SMEs. Investors are not merely placing money into blind pool funds- in fact, they can scroll through the mobile app and determine the investment parameters that suit their interests. This makes it easy for anyone to invest! The minimum amount that Funding Societies accepts for investing at the moment is RM100.
Products offered by Funding Societies
Funding Societies offers two products (apart from the newly released Dealer Financing), namely:
- Business Term Financing
- Invoice Financing
So, what exactly are the differences in these financing options? Business Term Financing and Invoice Financing differ in terms of the structure of the repayments and also the underlying risk assessment approach.
Business Term Financing relates more to working capital financing. Typically, it is structured in an equal instalment basis. So, hypothetically, every month, equal instalments of principal and interest will have to be made.
Invoice Financing, however, is underlined by invoices when the SMEs request for cash upfront without waiting for the credit period. The repayment period for this is on a bullet basis as there is only a single payment at maturity – usually tied back to the invoice payment dates.
Currently, Funding Societies are working on a few more specialised products which will be shared once they have been launched.
What about Dealer Financing?
Dealer Financing is a relatively new product offered by Funding Societies. It is a specialised product developed for car dealers to buy inventory. When asked for elaboration, Kah Meng paralleled this to Funding Societies’ partnership with Lazada – where they provide financing to E-Commerce merchants (for them to pay salaries, buy more inventory, stocks, etc). It is a product designed and targeted towards a specific type of use. The unique feature of Dealer Financing is that the company takes charge of the inventory that the clients buy. For instance, when a used car dealer sees a used car they want to buy, Funding Societies puts a charge on that car and then will help to finance the purchase. This helps the SMEs increase their transaction volumes so they can triple their business transaction loans using the same amount of funds.
Robo-advisors vs. Peer-to-Peer Lending: Friends or Foes?
Robo-Advisors and P2P lending are often pitted against each other. One of the biggest disadvantages of P2P lending is the risk, and it is a common belief that Robo-Advisors offer a comparatively safer investment strategy than P2P lending companies. While both options are great for diversification when it comes to investments, many urges to put more money into Robo- Advisor investment accounts rather than P2P investments.
Kah Meng, however, believes that both Robo-Advisors and P2P financing should co-exist in an investor’s portfolio.“You shouldn’t have it all in cash, or all in a fixed deposit, or all of it in stocks, or digital advisories or P2P lending platforms – you should have a balanced mix of it”. So regardless of one’s risk appetite, Kah Meng would not recommend everyone to go all-in when it comes to investing. It is important to understand the nature of their risk appetite and objectives of the investment. Hence, he believes that Robo-Advisors and P2P financing should be treated as complementary, rather than substitutes.
With regards to the issue of risk, it depends on the platform itself. Every P2P lending platform has its way of assessing risk, its track record in terms of default rates, its way of pursuing connection; so every platform is unique and as a result, every platform has a different “risk appetite”- just like how the banks have differing default rates.
The New Frontier with Auto-Investing
Artificial Intelligence (AI) is a buzzword in the financial service industry where countless start-ups are looking to use AI to design newer business models that can enhance the customer experience. Since P2P lending is one of the most revolutionary and disruptive financial innovations of all time, it is clear that Funding Societies has integrated the use of technology into the business through the Auto-Invest option that investors have.
This option is mainly for busy investors, that may not have the luxury of time to log into the website and view the different investment opportunities one by one, and manually invest. The Auto-Invest option allows an investor to see what kind of investment parameters they’re interested in.
For example, an investor wants a minimum interest rate of x%, a tenure of not more than y months, does not want to invest into certain industries and wants to have maximum exposure to a particular SME. Any investment opportunities that meet these qualifications and criteria will come up, and these investors will then be auto invested in these opportunities if the Auto-Invest feature is applied. This not only serves for convenience purposes but also allows investors to easily diversify.
Kah Meng himself states that ‘I invested into more than 300 loans, but I don’t select them loan by loan. I have set up my own Auto-Invest so it filters out and invests automatically for me.”
Innovative CrowdFund Talks Platform
The CrowdFund talks platform, an initiative by Funding Societies, is a fresh concept that provides transparency for all users. It is a space that allows for a free-flow discussion relevant to P2P financing issues where people are allowed to speak their mind- of course with certain guidelines in place to guard the privacy of for-clientele-only information. It is interesting to note that Funding Societies does not moderate the platform rigorously by jumping directly into every discussion thread that opens up- they allow investors to discuss and debate amongst themselves, but of course, there is a team to oversee the discussions and ensure users adhere to the guidelines.
Default-risk and unsecured loans
In Malaysia, there is a requirement to fund at least 80% of the requested loan. So, as long as the investment hits 80%, the funds are allowed to be dispersed. If the 80% mark is not reached, SME’s/Entrepreneurs have several options :
- Extending the funding period
- Changing the terms. Eg: Revising interest rates and making repayment tenure shorter.
- Cancelling the loan
However, it is interesting to note that, as per the time of the interview, Funding Societies has not failed to secure a loan for any parties who have used their platform.
When it comes to the risk of default, Kah Meng believes it is important to educate the public on the reason default happens. Essentially, defaults occur when an SME is unable to make repayments either due to financial distress or because of delayed customer payments. It is important to understand the nature of this inherent business risk as an investor so that it helps provide a realistic expectation and view when it comes to investments. In the event of default, Funding Societies comes in to help facilitate the restructuring or rescheduling of repayments that can help improve the situation for both the SMEs and the investors. To avoid this risk, there’s a procedure where all SMEs get a reminder just before repayment is due so that they’ll be mindful of the repayment dates. If on the due date those repayments are not forthcoming, Funding Societies will then reach out to the SME, to understand the reason for the abnormal frequency/ late payment. Furthermore, discussions will be conducted to gauge a plausible, realistic manner for them to make the repayments.
Funding our Society: The Story
Taking a step back as to why Funding Societies was started up in the first place, it’s the main purpose is to address the financing gap between SMEs. According to Kah Meng, Funding Societies has dispersed close to RM400 million in terms of SME financing loan in Malaysia and has served close to a thousand SMEs, all of whom had the choice to finance their business through the conventional method of bank loans. It is safe to say that from being regarded as a dodgy financing platform to being regulated by the Securities Commissions, Funding Societies has truly achieved new heights in revolutionising the financing methods of today. As more and more people become familiar with the idea of P2P lending and incrementally gain trust toward technological advancements, there is a bright future for more non-conventional financing means and clearly, only the sky’s the limit.
Working capital financing –
Working capital financing is financing that is used for a company’s everyday operations.
Bullet repayment –
A bullet repayment is a lump sum payment made for the entirety of an outstanding loan amount, usually at maturity. It can also be a single payment of principal on a bond.
Download the article : Wong Kah Meng-Funding Societies
Journalist: Supriya Sivabalan
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