Founded in 2015, Singaporean-based Funding Societies completed their Series C+ funding round on the 15th February 2022, raising over 144 million USD. This was led by the Softbank Vision Fund 2 and included existing investors such as Sequoia Capital as well as new investors such as VNG Corporation, EDBI and K3 Ventures. The firm also received around 150 million USD in debit lines from institutional investors throughout Asia, Europe, and the US. The firm claims to be the largest digital financing platform for micro-, small, and medium-sized enterprises (MSMEs) throughout Southeast Asia (SEA).
Funding Societies currently operate in Singapore, Indonesia, Malaysia, Thailand, and recently Vietnam, with plans to expand into the Philippines using the Series C+ funding.
The founders believe that MSMEs are the backbone of SEA economies, making up almost 99% of total enterprises in the region, and they have set out to develop Funding Societies into a platform that connects investors to borrowers. The borrowers are typically small firms with limited access to financing from traditional sources, which according to the founders of Funding Societies, is because they do not have traditional credit records or collateral, an issue that has developed into a 300 billion USD financing gap throughout SEA. Through their platform, eligible businesses can apply for loans. The applications are reviewed by credit and risk teams, and, if successful, they will use their investor network to fund the loan. The investor network includes individuals and institutions who invest in financing MSMEs through Funding Societies and earn returns on their investment in the form of interests, a concept called debt investing. The weighted average expected return rate for investors throughout 2021 was 7.09%, according to the firm’s website.
An AI-led technology is used to determine the creditworthiness of companies applying to borrow by analysing unique data sets on the applicant’s performance. According to the firm, it is more effective than traditional models, with the AI proving its capability throughout the recent financial crisis when SEA economies were impacted by the pandemic.
The platform provides loans valuing between 500 and 1.5 million USD, having so far dispersed around 2 billion USD through over 5 million loan transactions. MSMEs can include anything from local stores to fast-growth start-ups, and even corporations that want access to faster revenue-based financing. According to the firm, 47.09% of approved financing has gone towards wholesale and retail trade, the largest sector by far, followed by information and communication at 13.24% and manufacturing at 9.66%.
Co-founder and CEO, Kelvin Teo, stated that the loan default rate for the firm was between just 1% to 2%, even throughout the pandemic. Additionally, he mentioned that their main competitors are not banks but friends and family of the customers, many of whom used savings and personal credit cards (which charge equal or greater interest rates compared to Founding Societies’ loans) to fund business ventures. Greg Moon of Softbank stated that MSMEs have been “forced to rely on personal funding to support growth”.
A potential competitor in the region is KoinWorks, which has so far raised around 180 million USD and aims to similarly provide capital to MSMEs throughout SEA. The firm operates within India, Indonesia, Singapore, and Vietnam. Currently, their userbase is around 1.5 million customers, having tripled during the pandemic as more businesses went online. Willy Arifin, the co-founder and executive chairman of KoinWorks, stated that the firm’s monthly loan distributions are nearly 50 million USD, with revenue having quadrupled since 2019. He also mentioned that the firm became cash flow positive in early 2022 and has the ambition of reducing the 80 billion USD a year funding gap in Indonesia. KoinWorks provide a comprehensive platform to their customers, containing a variety of financial tools to help them increase their sales, suggesting that they are more diversified than Founding Societies at the moment.
Additionally, some start-ups are providing alternative financial services to MSMEs. Examples of this include BukuWarung and Lummo which provide bookkeeping apps that aim to support MSMEs as they digitize, as well as Wagely and GajiGesa, both of which provide payroll management platforms.
According to the Asian Development Bank, MSMEs backed by Founding Societies have contributed 3.6 billion USD to GDP and created 350,000 jobs. If the firm decided to provide some alternative financial services on their platform it could provide avenues for further growth. However, the market for debt financing alone appears to have significant potential, given the regionwide 300 billion USD financing gap which Funding Societies will be aiming to close in the future.
By Kristian Eklund
Sector Head: Gregor MacDonald