Delinquencies, Defaults, Losses. These are things that you may encounter in lending. These terms are sometimes used loosely and may cause quite a bit of confusion. In this article, we seek to clarify our approach and describe what these terms mean from an investor point of view, then look at how you can reduce their impact and still earn a good return at MoolahSense.
Why do they happen?
Businesses may run into difficulties for a wide variety of reasons. The most common causes are related to cashflow (i.e. customers not paying on time, or creditors demanding immediate repayment), increased competition leading to depressed margins, losing a large customer, key man risks or changes in the macro environment.
Consequently, a few of the businesses you lend to will be unable to fully repay their loans.
What happens when a loan is late, past due or in default?
This happens when a business is late in its repayments. We shall be touching base with the borrower from day 1 of past due and execute a range of efforts and initiatives to remedy the delinquency. Please read about our recovery process.
If we are informed of a borrower’s insolvency or breach of terms and conditions of the loan, the loan shall be in default. Our collections team shall pursue every single defaulted loan, arranging a new payment plan if possible, or exhausting every legal process available. Our team’s objective is to deploy a wide range of methods and technologies to recover as much as possible for you.
We’ll take the decision to default a loan if we think it’s necessary to protect the interests of investors. In some circumstances defaults are mandatory.
What is bad debt or loss?
When a loan has defaulted, bad debt is the money potentially lost by investors. This amount may be reduced during the recovery process.
When a loan defaults it will show the total loss on your account. Almost all MoolahSense loans are supported by a personal guarantee from company directors (loans to SGX listed companies can differ). If a business is unable to repay the loan, our team can look to recover the outstanding balance from the guarantors.
Historically, our team are able to recover a significant portion of that loss. As of June 2018, they have successfully recovered 45.42% of defaulted loans since 2015, so it’s worth remembering that the amount “lost” on any recent defaults may improve over time.
Reduce the impact of bad debt with diversification
Diversification is a simple way to help Flomax reduce the impact of bad debt on your investment. Diversifying means splitting your investment into lots of small pieces, and lending them out to different businesses.
Without diversification – As an example, say you lent S$10,000 all to just one business. If they defaulted on their loan, you could lose all of your money in one go.
With diversification – Instead, if you were to split your S$10,000 across 100 businesses, you could then lend just S$100 to each. Then if one or two of them defaulted, you would only lose S$100-200. You would still earn interest from the other 98 businesses you’ve lent to, so would still have a great chance of earning a good return overall.
How to diversify
Our auto allocation (AA) tool helps you to quickly build a diversified portfolio. It will split your funds into small chunks (minimum chunk size of $100) and lend them to different businesses. We suggest starting with S$3,000 or more, as this allows you to lend at least 30 businesses at the onset and gradually build up your holdings to 100 different businesses.
Every investor who has followed these two steps has earned a positive return.
Learn more about diversification here.
You can read more about our Collections & Recoveries process here.
Things to remember
Hopefully, now you have a better understanding of delinquencies and defaults. Here are a few key points to remember:
Bad debt is inevitable, so be prepared for a small percentage of loans to default. If you are sufficiently diversified, you’ve still got a great chance of making a good return!
Splitting your investment across at least 100 businesses, with no more than 1% lent to each one, reduces the impact of any defaulted loans.
We’ll help you out
Our team will work tirelessly to recover as much of the debt as possible, but this will take time. They will update you on the loan status through your MoolahSense account. Do bear in mind that collections and recoveries follow a process and that the outcome of each case varies. It is likely that periods of time may elapse with little or no material updates. It does not, however, mean that no efforts are underway – rest assured that our team is keeping tabs and acting on it!
Of course, if you have any questions, our Client Success team are on hand to help and can talk you through any activity on your account. You can call us to leave us your contact or email us at firstname.lastname@example.org.
It is important to remember that past performance is not a guide to future performance, and your capital is at risk when lending to businesses.