An interesting series of crowdfunding campaigns took place recently. MoolahSense led a (S$110k) campaign to fund Olive Green, a corn-starch packaging company. See here for my previous comments. What is surprising is that Capital Match soon revealed that it has funded a very similar company in June, for S$100k – and that company pre-paid its loan in September. Also, the company applied again to Capital Match for another 6-month S$100k loan! Are these companies the same? Is it borrowing from Paul to pay Peter, and Peter to Paul again? I had not foreseen this. But investors should now take note!
Let’s consider the facts:
July 2015: A corn-starch company (let’s call it X) took a 6-month loan of S$100k through CM. The same company pre-paid its loan in September. Company X was set up in 2008, turned profitable in 2015, and had a DP rating of 8.
Sept 2015: Olive-Green took a 3-month loan of S$110k through MS. Olive Green, a corn-starch maker, was also established in 2008, turned profitable in 2015, and had DP rating of 8.
End-Sep 2015: Company X applies for 6-month $100k loan through CM.
Olive Green looks suspiciously like Company X. After all, how many corn-starch leaders are there in Singapore? If they are the same company, then the timing would imply that the $110k 3-month loan through MoolahSense is used to repay the $100k loan taken through CapitalMatch’s plaform in July. If that is not enough, the company is now looking to take up another 6-month $100k loan. Will this 6-month loan be used to repay the previous 3-month loan?
All this merry-go-round makes me wonder if the company is making any real cashflow at all. If it perpetually needs $100k, then a permanent equity injection or term loan is far better than rotating different lenders at loanshark rates.
Should investors be concerned? Of course. If the company is not making enough cashflow at all to repay its loan, then it will always be dependent on the next lender. All this makes for good business for the lenders (~20% annualized effective rate) and the platform companies (2-5% fees) when the music keeps going. But when it stops, the last guy holding on the hot potato will be in trouble. Doesn’t that sound eerily similar to what happened to Lehman Brothers?