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Crowdfunding is an up and coming financial tool in Singapore. Crowdfunding allows businesses (Mainly SMEs in Singapore) to raise funding from a crowd of many individuals, rather than looking for large amounts from a few investors or from a bank. The transactions are lead online through crowdfunding websites. The draw for investors? Interest rates ranging anywhere from 6 – 20% per year.
As crowdfunding gains traction as an alternative Investment opportunity for institutions and investors, investors have a wide range of options platform for their campaign. Now the question is what are the main factors for investors to consider in their decision? In selecting a crowdfunding platform and specific crowdfunding opportunity there are some factors to be considered, such as:
The majority of crowdfunding platforms in Singapore allow for debt based crowdfunding. In layman terms this would mean that investors are lending a business money in return for a pre-agreed interest rate, that is paid out at the end of a pre-agree period of time. This allows for a fixed rate of return for the investor, who knows exactly how much they’ll be getting at the end of their investment timeframe.
Equity-based crowdfunding, on the other hand, allows the investor to take a shareholding in a company. This would mean that the investor has a stake in the company and is eligible for dividends of the company in perpetuity. This allows for investors to get returns from the company’s dividends. However, investors may find it difficult to foresee the returns they’ll be getting in the future, and if the company they invest in does not declare a profit, they may not get a return on their investment at all.
When investing using a crowdfunding platform, take note of the maturity of the crowdfunding opportunity you’re about to invest in and see if it matches your desired investment time-frame.
In debt-based crowdfunding, the investment period is typically listed alongside the crowdfunding opportunity and typically ranges anywhere between 3 months – 1 year.
In equity-based crowdfunding the investment period is a bit harder to determine, as the investor is invested in perpetuity and may not get a chance to exit their investment for a long period of time.
When considering a specific crowdfunding opportunity, it is useful to consider the industry and business sector that the company you’re lending money or investing in operates in. The risk of a default or shortage of payment may rise with the volatility of the industry or business sector that the company operates in.
If you are searching for a platform/ opportunity to invest in, you can mitigate risks by considering past records such as:
– Crowdfunding platform’s successful repayment rate
– Crowdfunding opportunity company’s profitability and growth potential
– Crowdfunding opportunity company’s net assets
When people think of crowdfunding they normally make some mistakes such as:
Choosing the wrong platform
You have to understand the distinctions between each type of crowdfunding site and their specific opportunities. Different platforms offer different types of crowdfunding opportunities. Certain types of crowdfunding opportunities are available on some platform and not others, different crowdfunding sites also have different levels of tolerance when it comes to the risk of opportunity providers (I.e. the risk level of companies they raise funds for varies from crowdfunding site to crowdfunding site)
Not taking default risk into account:
Although most crowdfunding sites have not met with a default case as of yet. This does not
indicate that investment through crowdfunding carries no risk of default on the opportunity provider’s (I.e. Company you invest in) part. While high interest rates are a norm in crowdfunding platforms, it is useful to consider why the company would be interested in making such large interest payments to begin with.
Always remember that most crowdfunding platforms do not guarantee the protection of your principle investment, there is a chance that on top of not getting your returns, you may lose out on your principle investment in its entirety.