Repayment delays and defaults are part and parcel of debt investment, especially in the SME lending space. Delays in receivables, loss of revenue and other factors that may be outside of the SME's control can result in delays in repayments, and even defaults.
This risk attributes to the higher returns that debt investment lending offers, but don't let the risk of defaults hinder you from earning great returns on a well diversified portfolio.
What actions are taken when repayment is delayed?
Apart from charging the SME late interest once the 7-day grace period is over, we also begin negotiations with the SME to understand the position they are in, and find practical ways of recovering the debt. Investors will be updated about the process of negotiations through repayment notes made available in their portfolios, which are updated to reflect the latest progress and changes.
What is a default?
If a repayment for a Business Term Financing or Property-Backed Secured Notes remains unpaid 90 days past the due date, we consider the note to be in default. The threshold for the definition of default for Invoice Financing as of 1st March 2021 would also be standardized with the rest of the products to 90 days. This does not mean that the SME will never pay, but that the non-payment is serious enough to consider recourse against them.
What is Funding Societies' default rate?
Our default rate is published on our Statistics page, and we undertake certain measures to reduce the risks of SMEs defaulting. Here are some steps you can take to reduce this risk.
In this event, what recourse may you pursue?
If an SME misses a repayment, and no other methods of recovery and negotiation are successful, we may recommend to all investors who had invested to start the legal process to execute the recourse, which we will execute on behalf of all investors.
The legal process could include issuing a Letter of Demand (LOD), Writ of Summons (WOS), Statutory Demand (SD), Bankruptcy Petition (BP), Enforcement Proceedings, Writ of Seizure and Sale (WSS) and Company Winding Up Proceedings depending on the SME's situation and cooperation in the process.
All directors of the company are required to provide personal guarantees on the notes. In the event of non-payment from the company, the personal guarantors are still liable to repay the note in their personal capacities.
On certain notes, such as where the SME is a listed company, a corporate guarantee by the parent company or other company related to the SME is offered in place of the personal guarantee. In this case, the company providing the corporate guarantee will be liable to pay in the event of non-payment on the note.