3 Ways Lenders Could Have Foreseen the Bust

The crowdfunding scene has undoubtedly sparked a high level of interest among investors. 


Could you easily tell whether you should lend your money to a fund seeker or not?


So what should one do? Other than carrying out the necessary due diligence on the companies' credit ratings and business model, you should also find out how the new funds will be used. Are they used to finance new projects or grow an existing business? If it's the former, do you have any information on what the project involves? If the funds are used to expand existing business, can they provide evidence of signed purchase orders/invoices?


So, how good are you in answering that question? Those who have participated in our recently concluded Lend or Fend Contest, you may have already gauged your ability to assess risks. In our 30th May announcement on Facebook about the contest winners (http://bit.ly/1Yc7gYo), we got a question about “the reasons to fend the other 2 companies away”.


This article seeks to answer why we think it’s wise to Fend off Company A.


In going through the discussion below, feel free to refer to the information available in the contest page - https://ph.seedin.tech/lendorfend.


Unless you were on some electronic detox the last 45 days, you’d have heard of an agency that has specialized in tours to South Korea, that went bust on 31 March.

Almost everyone was caught off guard. Around 300 customers were stunned. Some of them were looking forward to travel to South Korea for the first time. The travel industry was shocked. This travel agency was in the Natas travel fair at the Singapore Expo on 4 to 6 March.

We can perhaps argue that the bank that lent money to this travel agency and its partner, may have suspected something. But surely their heads are spinning today.

But there was one more group that were caught off guard: the crowdfunding investors. One of them was familiar to us. He was almost teary eyed when relating how he lost hard earned money to this travel agency.

Of course, these lenders are closest to our hearts. How could they have not foreseen this? The fact is, there are ways they could have foreseen it. Let us share 3 ways how.

#1. The nature of the industry


The travel industry, by its very nature, is plagued with competition and low margins. It’s relatively easy to put up a travel agency.

Source: http://bit.ly/1NBqsfv

The Singapore Tourism Board recorded 1,225 travel agents in 2015. In that same year, there were 145 new agents, down from 163 in 2014. Also in that same year, there were 119 travel agent cessations, up from 71 in 2011.

Source: http://bit.ly/1NBqvI9

To capture customers well, you have to locate your business where people crowd, which, necessarily, means you locate the business in high rental areas. Although a decrease in rental rates decreased in first quarter 2015, it was on an upright climb since 2013.


Lastly, put all that competition and high office space rents with the slow down of Singapore’s economy. You’d simply get the picture that the business terrain could be challenging.

#2. The specialisation of the business


The business focused on tour packages to South Korea. There were 13 of them doing the same thing as recorded in Visit Korea website.

Source: http://bit.ly/1NBt1hL

Incidentally, Korea isn’t among the favourite destination among Singaporeans, whether work-related, holiday or visiting friends or relatives.

It’s not difficult to see that the volume needed to sustain the business model would face serious challenges based on the specialisation alone. Thus, it has to keep its expenses low to stay afloat.

#3. The bank loan


This, to us, is the killer. A bank loan can indeed give the business some boost . . . until repayment time comes. Bank loans represent additional expense (the interest expense, of course) and a fixed cost (interest + principal) that must be paid on schedule, whether your business does well or not.

When a business faces stiff competition, experiences low margins and stands on a limited volume of business, something gives. We know that.

We believe that, instead of securing a bank loan, they should have sought additional investors to fix the cash flow problem without incurring additional expenses and fixed costs.

While Factors #1 and #2 above are easily searchable using Google, bank loan is not. That, however, is made available by fund seekers to lenders when they approach crowdfunding platforms.

To approach a crowdfunding platform while a bank loan is outstanding should already raise some alarm bells. Now, listening to these alarm bells in the light of industry information and the business model described above should already tell lenders to fend the fund seekers away.