Fractionalization
Fractionalization occurs when multiple investors and borrowers are part of a loan, multiple investors fund a single borrower, or a single investor funds multiple borrowers. The payment received from the borrower is paid to all the investors who funded the borrower's loan. The allotted and unallotted funds of the investor, therefore, keep changing based on their investments and returns.
For example, borrower X needs 5000 as loan amount, and the investors fund the loan as listed in the table below:
| Investor | % Funding |
|---|---|
| A | 50 |
| B | 30 |
| C | 20 |
When the borrower makes a repayment for the loan, the investors are paid back in the same percentage listed above.
For more details about calculating payouts made to investors, refer to Calculating Investors Payouts.
Setting up fractionalization is a multi step process, where you:
Enable your organization for supporting fractionalization of loans and investments.
Define the basic parameters for supporting fractionalization, for example, how investors must be paid, or any applicable fees.
Define the investor details.
Assign investors to loans.
Create an amortization schedule for investors to indicate their returns over the life of the investment.
Setting up fractionalization also includes contingency workflows in case an investor wants to back out of an investment in a loan, and the loan gets funded by a different investor for the remaining life of the contract.
Key fractionalization terms
The following are some of the key terms and concepts relating to fractionalization:
Certificate Rate - The rate at which investors get the return on their investment.
Investor - Any individual or institution that invests with the lender to fund loans. An investor is set up as an Account in Salesforce.
Investment Order - This is the investor's commitment to invest in a particular loan. The investor orders of a particular investor are available as a related list in the investor account. The Investor tab in the loan contract page also lists all the investment orders for that contract.
Interest Accrual - This is the investor's share of the interest component paid back by the borrower. The Interest Accrual batch job identifies..
Investor Amortization Schedule - The schedule that defines how the investor receives the returns against the investment on a loan account.
Investor Payout - Investors are paid returns on their investment from the interest, fee, and principal amounts paid by the borrowers. The fee component is shared with the investors only if the related option is set on the fee, along with the percentage share for all the investors.
Service Fee - You may charge a service fee to the investor for maintaining their investment portfolio.
Tax and service fee - As the interest and fee components paid to the investors constitute their income, you can define whether a tax is deducted on this amount before making payment to the investor.