In Oct, we had our first p2p loan default – TLC Cars. This led to a 5.7% hit to our portfolio, resulting in our first monthly loss at -4% in October. The good news is that another problem loan was fully repaid. 2016 return was still a respectable 11%. We have two more months to year-end and we’re hopeful we can clock at least 12%. Fingers crossed!
TLC Cars loan default
TLC Cars loan default came up as a surprise. We previously had other problem loans, but those borrowers continued to make partial payments despite being late. No such luck at TLC Cars. The director apparently borrowed significant amounts of money and vanished. His home was vacated, his employees does not know his whereabouts and his phone was off. We suspect fraud and understand that police reports were already filed. The platform that we used, Funding Societies, handed the case to debt collectors. But we’re skeptical that we can recover any money. More discussion on the case can be found here and here.
Most SMEs do not run away!
We also have several loans that repaid late or missed their payment altogether, but we’re not worried. Our experience tells us that most SME borrowers honour their debt obligations. The SMEs may face temporary cashflow issues, but they will make partial repayments or catch up with the schedules once the difficulties ease. The bad sheep like TLC Cars and S-Travels are quite rare, in our view.
One problem loan fully repaid
One good example is a problematic 12-month loan that we extended to a light snacks supplier. It ran into some cashflow issues in the fourth month and repayments are perpetually late. There were several occasions when the company looks collapsing. But we’re glad that the director stuck it down and finally completed its repayment in October. Bad debt is inevitable and chasing them is never easy. Kudos to Capital Match for doing a terrific job following up. Your efforts are much appreciated!
Our invoice crowdfunding experience has been great. We have invested in over 80 invoices. Over 20+ invoices were fully repaid and earned about 1.0% to 2.0% per month. But the best part is the lower default risk compared to unsecured p2p loans. Invoices are issued for work already done or goods already delivered. This is unlike most p2p loans where SMEs borrow money for future projects which may or may not succeed, especially when the economic conditions are challenging. To learn about invoice crowdfunding, do download our Investor’s Guide to Invoice Crowdfunding.
We haven’t described our invoice portfolio because it is hard to keep track of 80 invoices the same way we did for p2p loans. We’ll report them next year, using a consolidated portfolio approach. Stay tuned!
FX risk in our Crowdo p2p loans
Several readers enquired about foreign exchange risk on our Indonesia p2p loans on Crowdo. Yes, we’re bearing the foreign exchange risks. It is not economical or practical to do hedging. While we are exposed to fx risk, we are minimizing our credit risk by focusing mainly on the low-risk secured loans. The secured loans on Crowdo platform holds gold or jewelry as collaterals and give about 13% return.
In other words, unless we lose more than 13% in fx (IDR weaken by 13% against SGD), we are unlikely to lose money on our Crowdo loans. If we extend the time horizon to 2 or 3 years, then the odds are increasingly in our favour. It is not a sure bet, but we’re willing to take the risk.