Why SMEs Need Alternative Financing More Than Ever
SMEs in Singapore have had plenty to smile about ever since Peer-to-Peer (P2P) Lending platforms entered the scene.
Entrepreneurs and their small businesses continue to be beset with cash flow problems and snags, with DP Information Group’s 2017 SME Development Survey reporting that 35 per cent of SMEs faced financing issues. That was a 13 percentage point increase from 2016, and more than double the number from 2015. The increase was also seen across all industries.
Funding support for SMEs remains crucial, but traditional financial institutions make them pass through the proverbial eye of the needle whenever the need for money arises.
In that light, P2P Lending has emerged as a new and viable method of financing. According to the ASEAN SME Transformation Survey by Ernst & Young, over 67.8% of SMEs prefer non-traditional financing options like P2P lending platforms, because they offer a “much faster loan approval process with some alternative lenders capable of performing credit underwriting processes to qualify applications based on borrowers’ risk scores in almost real time. Basic requirements for obtaining finance are also more flexible, typically without the need for a guarantor, asset security or a visit to the physical bank branch, which shortens processing times by hours, if not weeks.”
What is P2P lending all about?
Online marketplaces are now the “go to” channels for lending activities to take place. The P2P consumer and business loans, reward-based crowdfunding, equity crowdfunding and invoice trading are among the popular products available.
The industry continues to grow, and as P2P lending sites become more mainstream and the lending instruments are fine-tuned, it will become a dominating trend that could compete to attract investors and win more customers, as has been seen in US, UK, China and many other countries in the west.
What can P2P lending offer?
Many SMEs regard P2P lending sites as heaven-sent. First of all, there are peer-to- company lenders (P2C) that are dedicated to extending financial support to SMEs.
If your business needs fund for business continuity, working capital or project financing, you can expect the following when you file an application:
- Secured loans with the flexibility to pledge invoices as collateral
- Hassle-free online application
- Turn-around times of as quick as 24hours from the application to the fund dispursal, compared to 5-6 weeks by traditional financial institutions.
- Timely release of loan proceeds
- Flexible repayment terms
- Loan amount ranges from S$3,000 to S$2,000,000
- The term of the loan is usually from 1 to 12 months
Funding Societies is one of the major industry players that provide SME business loans through crowdfunding across Singapore, Indonesia and Malaysia. The platform has crowdfunded more than S$240 million across 10,000+ SME loans as of October 2018, more than any other platform across the region. The lending processes and operations of other known online crowdlending sites are similar in nature but each platform is different in terms of products offered, geographies and speed of crowdfunding.
Other loan facilities
Aside from the straight up term loan, many small businesses find invoice financing as the most ideal. This short-term facility (up to 120 days) allows small businesses address their short-term cash flow constraints. SMEs can unlock the value of their invoices upfront by pledging the receivables and getting cash. In essence, repayments are aligned with or adjust to the business’ cash flow.
The annualized interest rate is usually in the range of 6.0% for secured loans to 16% for unsecured loans, which is slightly higher than what the banks and established financial institutions offer. For instance, Funding Societies makes downward rate adjustments for a property-backed business loan, as it is collateral-backed and secured. This is understandably so, as they provide more flexibility, speed and higher chances of funding at a rate that would be affordable, if SMEs look at the bigger picture.
Additionally, private lenders or investors who are funding borrowers which are not served or under-served by traditional financial institutions would demand higher investment returns. On the same note, borrowers need not worry about the well-known lending platforms as most peer-to-peer lending platforms are duly licensed by the Monetary Authority of Singapore.
Alternative Financing to support SMEs
The popularity of P2P lending sites is undeniable, with an influx of investors in the P2P lending sites and increasing participation in crowdfunding. Particularly with the portfolio delinquency is holding up and there are fewer incidences of loan defaults.
The double-digit interest rates lure investors while the unsecured nature of the loan facility works best for SMEs and entrepreneurs. Both are winners in a sense. If not for the tireless efforts and matchmaking skills of these platforms, SMEs would be hard pressed to play its role in economic growth.
The optimal use of technology-based programs also performs a great deal to connect SMEs with finding requirements and investors looking for passive income. But as a final reminder to borrowers, make prompt payments to maintain a good track record. Otherwise, you will need to rebuild your financial records to become credit-worthy, even to alternative financing platforms..