Funding Societies: Building a crowdfunding platform to support small businesses

Strengthening the community by providing access to capital for small businesses

Singapore is a global financial centre that accommodates the regional headquarters of many multinational corporations (MNCs). The highly developed and well-banked city-state may seem like a strange location to launch a crowdfunding platform for business loans. Nevertheless, the co-founders of Funding Societies Kelvin Teo and Reynold Wijaya recognised that small and medium sized enterprises (SMEs) were often unable to secure the necessary loans to sustain their businesses. The Harvard schoolmates not only felt that there would be demand for their company’s services but that they would also be able to positively impact the local community.

Bifurcated Financial Services Industry

The local business ecosystem consists of MNCs, large domestic companies and SMEs that includes family businesses, self-employed individuals, and start-ups. In 2018, the 263,900 SMEs in Singapore accounted for 99 percent of all enterprises and 72 percent of employment.[1] These companies have little bargaining power and have to deal with cash flow disruptions due to delayed payment from customers or demands for upfront payment from suppliers.

While SMEs usually approach banks to apply for loans, corporate banking processes favour lending to large companies. SMEs have to undergo stringent checks during the application process. Banks typically require borrowers to earn at least $300,000 in revenue and a two-year operational track record; new businesses are considered risky as many do not survive past the first year.

The outcome of a loan application depends on the personal credit scores of the business owners, the strength of the management team and its ability to execute its business plan. The problem is that banks have to assume fixed underwriting costs regardless of the loan quantum and SMEs usually lack collateral that would make the risk-reward ratio more attractive.

FinTech Solution

Teo and Wijaya felt that debt crowdfunding platforms could fill the funding gap in Singapore and the wider Southeast Asia region. Funding Societies began its Singapore operations in June 2015. By August 2016, Funding Societies had successfully expanded its operations to Indonesia and Malaysia. The company offers three types of products - business term loans, invoice financing, and smaller quantum working capital loans known as ‘FS Bolt’ - and earns a service fee by matching investors with borrowers.

Funding Societies is capable of providing loans to companies that lack access to traditional bank financing. Wijaya explains the company’s value proposition, “Many SME owners don't have any business records and some don't have any bank accounts, so it's hard for them to access loans from banks. That's where we come in to offer the solution of fair interest loans with easy requirements.”[2]

SMEs will be able to benefit from the ease of online loan applications and quick application to disbursement turnaround times. Funding Societies assesses the creditworthiness of potential borrowers by utilising advanced data analytics and machine learning to evaluate a large number of variables. Based on the credit risk assessment, individual investors can then decide how much they want to lend to the borrower. The default risk is mitigated as the loan amount is split among multiple lenders.

Funding Societies also provides an alternative source for funding for existing bank clients. Henry Tang, Assistant Strategic Partnerships Manager at Funding Societies, shares how the company’s relationships are built, “Established businesses are not spared the ups and downs in business performance. On days when a business’ books are good and bank account balances are healthy, banks have no trouble offering loans to them.

However, banks have a lower tolerance for risk, so when a business is facing tough times, they are likely to be turned away. That’s when they look to alternative sources of financing like P2P (peer-to-peer) lenders. Then when the business turns around, they show a stronger inclination to go back to the lender who helped them through tough times.”

Competitive Space

The industry has grown since the first P2P company MoolahSense was established in 2013. Low barriers to entry resulted in competitors, such as CoAssets, SeedIn and CapitalMatch, joining the fray.

Despite the competitive environment, Funding Societies experienced exponential growth and became the largest P2P lender with $688 million in total loans funded as at July 2019.[3] However, Teo was careful to avoid growth at the expense of diligence. “There's huge potential for the market to grow much bigger, but currently, there are too many substandard platforms. It drives a lot of negative competition.”

Funding Societies was unwilling to reduce costs by taking risk assessment shortcuts. The founder of Ezubao, a lending platform in China, was found guilty of running a Ponzi scheme disguised as a P2P lending platform and 900,000 investors were defrauded of US$9 million.[4] The negative headlines hurt the industry.

“There is still low awareness about P2P lending, or SME digital financing among SMEs, as a viable form of financing. While other markets are notably different from South East Asia, the poor performance of similar platforms overseas can dampen confidence amongst VCs and PEs.”

Funding Societies decided to ensure the proper management of funds by using an escrow service. Jacquelyn Yang, Senior Marketing Manager at Funding Societies, explains, “This industry that we are in is actually a trust-based industry. If our default rates go up really high, it weakens investor confidence in us. Just as the SME side of the business needs to grow, the investor side of the platform needs to grow as well.”

Social Responsibility

The goal of Funding Societies is not to maximise profits but to foster sustainable growth in South East Asia. Teo clarifies that Funding Societies is not truly a P2P company. “As the name peer-to-peer (“P2P”) lending suggests, it’s a business model whereby a platform enables an individual to lend to another individual. Attractive as it may be, we find consumer loans to be consumptive, while SME loans to be productive by nature.

"We chose the harder path of peer-to-business (“P2B”) financing, because SMEs account for nearly half of GDP and 2 out of 3 jobs in Southeast Asia, enabling us to achieve greater impact in societies. Hence as an SME digital financing platform, Funding Societies give unsecured loans to SMEs for growth, crowdfunded by investors for sustainable returns.”[5]