The Rise of Debt Based Crowdfunding

How You Can Achieve Higher Returns By Tapping Into Debt Based Crowdfunding – Interview with MoolahSense CEO Lawrence Yong


Truth be told. Some years ago before BigFatPurse grew from a blog to a business, we were faced with an identity crisis.

We know for sure what we wanted to achieve – to help retail investors level the playing field, to address the inefficiencies in the markets and to disrupt the traditional (and if we might add, not always correct) way traditional finance is being conducted. For a long time we do not know how to go about achieving it.

We pondered many ideas – and one of them was a crowdfunding platform to match lenders and investors with companies in the need of funds. Efficient resource allocation forms the basis of a capitalistic society. The idea ranked pretty high on our list. We just never got down to doing it.

Apparently we were not the only ones with the same idea.

We first read about MoolahSense last year. They are a lending platform that allows investors to finance SMEs in return for an attractive rate of return.

Some weeks ago we met up and chatted with Lawrence Yong, CEO of MoolahSense.

Prior to founding MoolahSense in September 2013, Lawrence worked in the financial services sector for more than 12 years, half of which was spent in wealth management at a major British bank, and the latter half as an investment banker, where he helped large corporations issue bonds to institutional investors.

He shared with us how MoolahSense started.

During the global financial crisis, I became attuned to the debates about the role of finance. One eventful evening, it dawned upon me that I had spent much of my career working for the top 10%. When I chanced upon peer to peer (p2p) lending, I became very fascinated by the use of internet and social technologies to resolve challenges that the mainstream financial sector finds challenging. This became my new-found purpose – to better meet the needs and wants of the “under-served” segments of the financial system. 

By matching Small and Medium Enterprises (SMEs) in search of funds for with retail investors looking for higher returns for their excess cash, MoolahSense caters to not one but two segments that are largely underserved.

Helping SMEs to raise funds

SMEs play a significant role to our economy. They comprise 99% of our enterprises, employ 70% of our workforce and contribute more than 50% to our GDP.

However, the proportion of loans that they garner from our entire banking system is less than 20% and 4 out of 5 of those loans needs to be secured (by property, equipment or other assets). The allocation of capital to SMEs is disproportionate to their importance.

Large firms have no problem attracting bank financing. Not only that, they can also tap the capital markets by issuing bonds. Such an option is not available to the majority of SMEs.

Many fledging SMEs are also shut out from traditional bank financing because they would be required to collateralise the loans. It is hard to come by young companies which are able to provide assets to back the loan against. Many companies turn to their founders to provide personal guarantees in order to expand.

As a result of that, entrepreneurs are compelled to sell equity too cheaply too early in order to raise capital. Entrepreneurs have the option of not diluting their ownership if there were able to attain loan financing. The lack of adequate financing reduces the incentives for entrepreneurship and this has a detrimental effect for our economy.

Helping Retail Investors achieve higher returns

On the other side of the equation are retail investors.

Retail investors do not lack access to equity products. As Lawrence rightly points out, equity is the riskiest asset class. However, not everyone is willing to assume so much risk. Many are just satisfied with an inflation beating level of return. To achieve that goal, they simply have to turn to bonds.

Unfortunately, most corporate bonds are sold for $250,000 a piece. SGX has in the recent years tried to get this market off the ground but up till date there are only six corporate bonds trading and available to retail investors.

Because there is so little awareness in bonds, there is very little demand. Due to the little demand, bond products tend not to trickle down to the retail investor level. Investors end up seeking yields from stocks. The vicious cycle perpetuates.

At Dr Wealth, we firmly believe that investors must arm themselves with basic knowledge of different asset classes. Economies move in cycles. Understanding only the stock market is, to paraphase Munger, like a one legged man trying to kick ass.

The difference between stocks and bonds

Here, Lawrence does a great job explaining the differences between stocks and bonds.

There is an adage in Finance. Equity investors look at a glass half full, while Fixed Income investors look at a glass half empty.

When companies issue equity, they sell “hope” to investors. Investors buy shares on the hope that the company will be able to deliver the projections communicated by the management. However, by design, the company is not bound by any contract to deliver any returns to the equity investor. Conversely, if the company exceeded their projections, there is no cap on the returns that an investor may get.

When companies issue debt, they make a “promise” to investors. When a company borrows, they commit to repay investors the principal with interests on a scheduled date with a maturity period. Unlike equity, this is a contractual obligation by the company. An investor’s return is therefore pre-determined by the interest rate. Even if the company does exceedingly well, their returns will be capped. But if the company’s business becomes less profitable, they are still required to repay the debt investor at the contracted rate and time period, failing of which will constitute a breach of contract. 

Debt is prevalent in every day life, be it in the form of a study loan, housing loan or car loan. At MoolahSense, investors find themselves on the other side of the table. They now become the banker, lending money to the needy. In doing so, they assume the credit risks of the company and the only assessment they need to make is the ability of the borrower to repay the loan.

We asked Lawrence about his thoughts on the future of crowdfunding and MoolahSense.

I believe crowdfunding has the potential to democratize finance in availing access and opportunities to SMEs and everyday investors, who despite being in the majority, are under-served. MoolahSense has a mission to tackle market failures and address unserved customer needs in the broad landscape of finance.

Today, we can make our biggest initial positive impact in Singapore by solving financing issues for local businesses and helping individual investors on the path to more decent returns that meet their objectives. In so doing, we aim to foster an entrepreneurial culture that is aligned and supportive to our broader national narrative of creating quality jobs.

MoolahSense is now into their third campaign. Both the first and second (Smaths Consulting and First Media Design School) campaigns were over-subscribed, raising $100k and $250k respectively for the borrowers. Close to 100 unique investors for both projects were attractively compensated at 9.9% and 11.98% respectively.

Campaign Number 3 has just been launched. Casual Korean dining chain Seoul Yummy is looking to raise 200k for expansion. The campaign will close on the 14th April 2015. MooahSense has a series of information sessions lined up. Visit MoolahSense to find out more and to subscribe to the offering.

The Financial Services sector is heavily regulated by MAS and any system that challenges the status quo will be subjected to large scrutiny. Prior to getting it off the ground, the team spent three years engaging with the regulators. It was by no means an easy journey.

We were glad we did not venture into this space eventually. For sure we could not have done a better job.

At this moment, no one is better positioned than Lawrence and MoolahSense to see to the growth of Debt Based Crowdfunding in Singapore. We believe in his cause and wish him great success!