Peer-to-Peer Lending (P2P Lending)
Peer-to-Peer or more commonly known as P2P lending started in the US and UK slightly over a decade ago in 2005. Its global value is expected to hit an astounding USD1,000 billion by 2050. In recent years, this form of alternative lending has been experiencing a steady shift to target the 640 million population strong Southeast Asian market, with Singapore and Indonesia amongst the most mature players.
P2P lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending websites are financial matchmakers, online money cupids marrying up people who have the cash to lend and who are looking for a good return, with individuals or companies wanting to borrow. The sites themselves profit by taking a fee. With the banking middleman cut out, investors putting up cash for lending can get much higher rates than they would from a savings account, while borrowers often pay less than with a conventional loan.
SME can benefit from P2P lending when they do not have a track record long enough to access conventional lending from banks or other forms of funding, lending doesn’t just happen no matter what, borrowers are selected from all those who apply using credit checks and rated according to risk. The platform does all the repayment chasing on the lenders’ behalf.
The idea of P2P lending is very attractive for SMEs that do not meet the criteria for conventional loans but, so far, it has never had to withstand a global economic crisis like the one created by the pandemic. So, it is even more important to do due diligence on the P2P lending platform before applying for a loan. The most reputable P2P lending platform show their statistics on their website, One of the tell-tale sign of problems is the announcement that the platform is closed to investors (i.e. new lenders). On the surface, this may appear like something of no interest to a borrower, but many regulators stop a platform from seeking new investors if they present too risky an investment. What happens when a P2P lending platform is in serious trouble has not been tested yet.
P2P Lending vs. Crowdfunding
Venture capital is only an option for the right company if the sum required is large enough, angel investors willing to invest small amounts in a young SME are another form of P2P lending. The process of when seeking small investments from a large number of angel investors is called crowdfunding.
Crowdfunding is usually not defined as lending. Several private individuals invest in your business in exchange for shares. Crowdfunding is the P2P Equivalent of Venture Capital. It is not a loan to pay back, it is an investment in your company. Investors hope to make a profit selling their shares either back to you or to other investors. The process is very similar to Venture Capital except you pitch to angel investors either directly or through a platform.
P2P lending vs. Bank Loans
According to research from Deloitte, 50% of SMEs in South-East Asia (Singapore, Indonesia, Malaysia, Thailand, and the Philippines) are underserved by banks.
Sometimes SMEs have a hard time access conventional loans because they do not have the minimum track record required by banks, or they cannot put up the collateral required.
P2P lending platforms leverage advanced technology for increased efficiency to meet SMEs’ varying demands for working capital and expansion needs. For instance, some platforms approve and disburse some business loan applications as quickly as 24 hours after the application has been made. Because of this quick turnaround, SMEs that may need funds urgently turn to P2P lending platforms.
P2P Lending vs. Invoice Finance or Business Line of Credit
P2P lending is just another way to obtain funding, it should be considered like a secured or unsecured term loan. In other words, its best used when you need capital for a specific project, expansion, or if you want to weather a downturn. An SME may get better terms than a conventional loan but the overall logic is the same, a lump sum repayable over a specific period of time through regular payments of a fixed amount of money.
Some P2P lending platforms also finance invoices, for up to a certain amount and a certain number of days. Whereas conventional lenders would show all the terms, including interest rate, a P2P lending platform would disclose the interest-only after you have applied. Depending on the credit record, P2P lending could also be used flexibly, even if the platform does not show invoice funding facilities. It all depends on how much you need and how long the repayment is going to be. You can seek to fund your invoice borrowing from a P2P platform by going for a relatively short repayment that starts when you think you are being paid. This loan would be registered in your credit record though and that would mean that it may become complicated for you to make a habit out of funding your invoices through P2P lending.
P2P Lending in Singapore
Platforms that provide P2P lending in Singapore have raised business loans amounting to approximately USD163.75 million in 2016 alone. Under the Securities and Futures Act, P2P lending platforms are required to apply for a Capital Markets Services (CMS) license from the Monetary Authority of Singapore (MAS). This accreditation provides a regulated environment to protect stakeholders involved, which is both the lenders and the borrowers. Despite being a fairly adolescent industry, the Singapore market has grown considerably and should continue to grow in the future.
There are a number of P2P lending platform in Singapore and Malaysia offering a number of lending arrangements such as:
- Micro Loans, for instance around SGD 100,000 to be repaid between one and twelve months
- Invoice Finance, up to SGD 1 Million for up to 120 days
- Term Loans, up to SGD 2 Million to be repaid between 1 and 36 months.
- Crowdfunding, strictly speaking, is not lending, you give shares in exchange for funding.
(N.B. the amount listed above and the terms are just examples, they do not represent the offering of a specific company)
P2P Lending for Lenders
P2P Lending is also an investment opportunity. Investors can invest by crowdfunding the business loans available on the platforms and potentially earn returns in the form of interests typically ranging in the mid to high single digits. Investment can start from a very low amount, which investors can leverage on for their portfolio diversification. Depending on the loan product, payouts can be done monthly so investors get their investments and returns in a shorter time frame. Compounding returns, as well as a rather short learning curve, are attractive incentives as well.
That said, repayments can be delayed or go completely unpaid. This is why it is imperative for the P2P lending platform to first do a preliminary round of due diligence and present the facts comprehensively to investors, before allowing investors to decide whether or not to proceed. There is also a risk of the P2P lending platform shutting down if it is not financially stable on its own. As we mentioned earlier as a warning to borrowers, P2P lending has not as yet weathered economical difficult times at a global level like those triggered by the COVID-19 containment measure. To mitigate risk to investors, P2P platforms regulated by MAS are mandated to engage an independent escrow agent to handle all investor funds separate from its business account, such that the escrow agent can continue to manage funds even if the platform goes under. This provides peace of mind to investors. In any case, there is a need to do your due diligence and ensure such investments match your risk appetite.
P2P lending platforms take their fees from investors based on a percentage of the interests repaid, some also charge a factoring fee, others an account management fee. Like prospective borrowers, prospective lenders need to make their due diligence before investing their money with a specific platform.
Although P2P lending is still a fairly young industry within Singapore, the demand is ever increasing. 99% of businesses in Singapore are SMEs and the returns on investments typically range in the mid to high single digits interest rate per annum. P2P lending in Singapore serves both the needs of SMEs and investors.