Funding Societies & P2P Crowdfunding

By: Jotham Lim

Obtaining proper and sufficient financing has always been a significant obstacle for many small-medium enterprises (SMEs) here in Malaysia. Questions regarding alternate SME financing solutions have resurfaced in recent months, and businesses are in dire need of answers. Funding Societies is one of the many initiatives that have responded to the call to arms, and we are glad to have Mr Wong Kah Meng, CEO of Funding Societies Malaysia, on board to answer some of the pressing questions many have in mind.

What is the Inspiration behind the Founding of Funding Societies?

Before Funding Societies, we always knew that securing financing options for SMEs had always been a big issue, not just in Malaysia, but across the entire Southeast Asian region as a whole. While fintech companies are booming in China, the industry is severely lagging behind in Southeast Asia.

We believe that we can address the serious financial issues that exist in the local economy and we see plenty of growth opportunities here. Hence, Funding Societies was founded in 2015, within the confines of a tiny room off one of the tunnels between buildings on Harvard Business School campus, by the founders Kelvin Teo and Reynold Wijaya.

Please Share with Us the Business Financing Landscape here in South East Asia, and how Does Funding Societies Fit into that Picture?

SMEs are the backbone of the Southeast Asian economy, contributing about US$ 1.1 trillion or 49% to the whole GDP of all ASEAN countries. In fact, SMEs created three out of every four jobs in these countries. Here in Malaysia, SMEs form 98.5% of the total establishments in the country, and it does not stop there. According to the latest review of the 11th Malaysian Plan 2016-2020 report, SMEs are expected to contribute up to 41% of the country’s GDP by 2020.

Yet, these competitive sectors are slapped with a financing gap of US$ 120 billion yearly, and applications for business loans are mostly met with heavy resistance. Funding Societies aims to service these underserved SMEs in Southeast Asia, to provide them with the financing they need by gathering public support and funding with the help of technology.

Traditional financial institutions require businesses to have a three-year track record and sufficient collateral, which are significant hurdles for many SMEs on the market. We do not aim to compete with these institutions but to instead co-exist with them by serving a different market segment. We provide up to RM2 million worth of working capital financing for businesses that are expanding rapidly, or to bridge short-term credit gaps through a fast and straightforward online-based process.

What Are the Common Misconceptions People Have towards the Industry and how Would You Address Them?

P2P financing is new to the Malaysian market. Very often, we come across SMEs who thought we were unlicensed money lenders and investors who thought we were a Ponzi scheme. There is a lack of education and awareness of P2P crowdfunding in the market, and initially, it is difficult to build trust and credibility amongst both local SMEs and investors.

We address these misconceptions by highlighting that we are heavily regulated by the Securities Commission (SC) of Malaysia. In fact, Malaysia’s SC is the first regulator in Southeast Asia that took the bold move to regulate the P2P financing industry in 2016, a commendable move on Malaysia’s part.

What Makes Funding Societies an Attractive Financial Solution as Opposed to Traditional Forms of Business Financing?

From a bank’s point of view, SMEs are a relatively riskier avenue for investment, hence the need for sufficient collateral and years of operational records. However, not all SMEs can produce the requirements needed and thus, were not given the attention they deserve.

Our platform has no need for collateral to mitigate risk. Instead, we address risk directly by paying more attention to their repayment behaviours and repayment capabilities. To better control risk, our finances are also limited to very specific purposes, mostly to facilitate purchase orders and bridging for various projects.

We also provide shorter financial tenures, reducing interest cost and also minimising investment risks for the investors. By investing in SMEs, investors could earn risk-adjusted returns higher than fixed deposits, bonds, and other traditional investment instruments. It’s a win-win situation for all parties involved.

What Makes Funding Societies Stand out amongst other P2P Crowdfunding Platforms?

As with all investment opportunities, most investors are concerned with these four criteria - Is it new, safe, easy and big?

The headquarters of Funding Societies is based in Singapore, the biggest economic hub in South East Asia, and it has grown significantly over the past couple of years and expanded to Indonesia and Malaysia when it started in 2016 and 2017 respectively. For Funding Societies, we have disbursed more than RM 1.5 billion in financing to SMEs regionally across more than 300,000 investment notes.

Kudos to our strong credit assessment team, as our platform has one of the lowest default rates in the region, hovering at less than 1%. Most of our notes also have a relatively shorter investment tenure with an average of 8 months compared to other platforms with 2 to 3 years tenure.

We are still a fintech company at heart, and we are proud to have a robust internal tech team that can answer the fast-changing needs in the financial industry. We have just launched Auto-bot 3.0 recently with new features, giving investors more control to invest based on their personal preferences.

I believe that we have hit all four of the criteria needed as we are backed with strong business fundamentals, and we are here to stay for the long haul.

How Do You Qualify the Companies You Invest In?

Being a P2P Financing platform, we have an obligation to answer to the investors by taking risk management and control very seriously. We conduct rigorous due diligence to ensure that the borrower is creditworthy. We have access to the financial condition and credit rating of a company to determine if this company has a healthy financial background and repayment capabilities before approving it. Here is a sneak peek of internal guidelines when qualifying companies to invest in:

• FS Bolt (micro financing up to RM50,000): Turn-over RM60,000 and above; minimum of 6 months operation.
• SMEs Financing (financing amount up to RM2,000,000): Turn-over RM1,000,000 per annum; minimum 1-year operation.

Your Platform Opens the Door to New Investors Who Are not well Versed in Financial Literacy. Does This Pose a Problem?

Funding Societies is founded on an idea that P2P investing should be made easily accessible to the public.

We have low barrier entry; from as little as RM100. We also actively encourage diversification by investing in multiple different notes through educational articles and capping exposures. P2P investing is also not as research-intensive as investing in the stock market per se.

I do not view our platform’s easy access as a problem but as a strong selling point instead.

Investing in This Platform what Are the Risks Involved?

The main risk of investing in our platform would be having our borrowers default on their promised repayments. Hence, we actively and consistently stress the need for our investors to diversify their investment portfolio.

Despite that, Funding Societies Malaysia currently only has a default rate of 0.5% throughout its two years of operation, disbursing over RM100 million to more than 300 SMEs. We have not encountered any significant issues with repayment so far, but default cases are nearly impossible to avoid entirely.

Your Company is Adopting the “Skin-in-the-game” Philosophy. How Widely Has This Philosophy Been Implemented?

My partner and I have personally invested in every note that has been made publicly available on our platform. We place ourselves in the shoes of our investors and share the same goals and objectives as the people vested in our platform.

With this, we are much more incentivised to screen our investment candidates more carefully and diligently, chasing after repayments for the sake of it. It would be quite hypocritical to push forward an investment note that we ourselves lack confidence in.

Is there a Possibility of Funding Societies Expanding to a Global Level, Allowing Investors to Invest in overseas Countries as Well?

Our focus and intention have always been serving the South East Asian market. In fact, we are in the midst of expanding our services to a fourth country, which we will soon officially announce.

I would say it is difficult to handle notes situated in other countries with a single account due to the different regulatory requirements needed. However, if investors are interested in investing in various companies, they can have multiple accounts on the official website of the respective countries.

Finally, what Are Your Aspirations and Expectations for This Industry Moving Forward?

Despite the economic slowdown this year, I expect the P2P financing industry to continue its growth moving into 2019. I would like to thank and attribute this to the local government’s supportive initiatives, such as reducing income tax targeted at SMEs. Such efforts give SMEs room for expansion, which indirectly helps our industry as well.

As the industry is driven by the anticipated slowdown in emerging economies, SMEs will find it difficult to obtain financing from banks. Moving forward, I foresee alternative debt financing platforms such as P2P financing becoming an increasingly important avenue to obtain funding, support business growth, and help steer through these challenging times.

We hope to play a prominent role in supporting those on a quest for rapid growth and serve as an answer to the expectations of the investors who have shown interest and faith in our platform.