The Best and Worst Advice We’ve Ever Heard about Crowdfunding

Due diligence is vital. Avoid fraud by asking for and reviewing factsheets. A crowdfunding or P2P lending platform should have performed their own thorough research, but if you want to protect yourself – do your homework!


Don’t invest in a person or a company on the basis of its name and fame

 

The rise and rise of crowdfunding and its offshoots has attracted big names. Celebrity artists like Neil Gaiman and Whoopi Goldberg have utilized Kickstarter campaigns. Businesses more familiar to our ears have begun to utilize peer-to-peer lending to borrow money. How exciting to invest in their projects!

Careful though! You know the saying: “if something is too good to be true… it usually is.” A famous person or a famous company creates a sense of awe. Thus we automatically assume they are more investible. Yet celebrity and fame may be shiny veneers masking some rot underneath.

Normally, crowdfunding is a refuge for unknown artists, start-ups, and SMEs, not establishments that can borrow from banks. Ask the important questions: is this famous figure close to bankruptcy and has exhausted other loan sources? How is this company doing according to its financial statements? Is it growing? Healthy? Well-run and profitable?

It sounds as though we are making light of our own field. We’re not. We’re just being objective. To us, a fishy loan is a bad loan.

 

Do your research

This is related to advice number 1. Due diligence is vital. Avoid fraud by asking for and reviewing factsheets. A crowdfunding or P2P lending platform should have performed their own thorough research, but if you want to protect yourself – do your homework!

This seems obvious, but you’d be surprised by how often investors and backers dismiss due diligence. Reasons vary. Some investors and donors are ordinary people without financial expertise. Some crowdfunded projects are so small that they lack sophisticated statements. Even so, you are allowed to ask for the crowdfunded entity’s financial accounts if you are investing in it.

It is crucial to learn how to read financial documents. Learn what accounting elements show the health of a particular company. Learn what accounting elements display the growth of a business entity.

Due diligence takes time and is neither fun nor sexy. But is it necessary? A thousand times yes.

 

Do diversify your loans

Our third advice relates more to P2P lending investors than crowdfunding donors. Crowdfunding backers tend to donate funds out of altruism or for intangible rewards. However, if you are crowdfunding as an alternative investment, diversifying your loans is a must do!

What is diversification? It simply means distributing your money across as many loans as possible to prevent loss in the case of a bad loan.

No matter how thorough our due diligence, risk is an inevitable element of any investment. Diversification is the answer for such risks. For example, if you pour S$1000 in only one company and it defaults, your returns will drastically drop. You will probably lose money. Yet when you spread your funds to two, five, even ten businesses, your returns will remain positive and will stay close to the expected rate of return.

It’s important to repeat: diversification keeps your rate of return steady, even in the case of defaults.

 

Do reinvest your returns

Our final advice also pertains more for investors building a portfolio. If you want to maximize your venture into crowdfunding, you need to start reinvesting.

What we mean by reinvesting is using your gains to fund other P2P lending projects. Reinvesting multiplies your returns. Now, who doesn’t want to double and triple their money?

Without reinvestment, you simply receive gains according to a loan’s expected rate of return. Here’s an example: You invest S$1000 in a business that offers an annual 20% rate of return. The business succeeds. You earn returns of S$200 in a year.

Let’s see what happens when you reinvest. You invest S$1000 in a similar business that offers a 20% rate of return. After month 1, you earn a return of S$16.70 (from annual gain of S$200 divided by 12 months). Immediately, at the start of month 2, you reinvest the money into a similar loan. At the start of month 3, you reinvest your earnings from month 2 into yet another loan. And so it goes until the end of the year, when it is very likely you have doubled your investment instead of gaining a profit of mere 20%.

Reinvestment requires minimum effort and it’s a great form of passive income. All the more reason it is a definite do!



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