As seen on http://dollarsandsense.sg/how-peer-to-peer-lending-can-help-smes/
Small and Medium Sized Enterprises (SME) in Singapore are presumed to be unsexy, boring and tasteless. These are common thoughts of what SMEs are like in Singapore.
Nevertheless, they are important. Here are some factual numbers that SMEs contribute to the Singapore’s economy.
- 99% of Singapore’s enterprises are SMEs
- 70% of the workforce is employed by SMEs
- SMEs contribute almost 50% of Singapore’s income (a simplistic way to denote GDP)
The 187,000 SMEs employs a total of 1.53 million citizens and permanent residents in Singapore. They also contribute about SG$195 billion to Singapore’s 2014 GDP.
This should give us an idea on why the Singapore’s Government has always been trying various ways to help SMEs grow and excel. However, there are limitations to how much the government can do.
Financial Institutions in Singapore, such as banks and finance companies, have an important role in helping SMEs grow and prosper. However, they have stricter regulations and legislations imposed that would discourage them from lending to SMEs.
A frequent problem that many SMEs’ owners face is managing short-term credit requirement.
Who else can help SMEs?
Peer-to-Peer (P2P) Lending could be the long-term solution for SMEs capital requirements.
P2P lending is generally operated online where the P2P organization will match SME borrowers with investors (i.e. lenders)
Here is a breakdown of the typical process.
- P2P organizations will locate SMEs that requires funding
- They will screen these SMEs for the quality
- Provide information via their preferred portal (usually websites)
- Interested investors will pool resources
- P2P organization will facilitate the underwriting of the lending contract
- Upon confirmation, investors will release the funds to SMEs as a LOAN (not equity stake)
Different P2P organizations may have varying business models, however the fundamental mechanics are very similar.
Why should an investor consider P2P at all?
- Low interest rates by bank savings deposits
According to statistics tabulated by MAS, the average bank savings deposit rates of ten leading banks and finance companies are 0.11% per annum. That would mean that for every $100 you leave in a savings deposit account, you would generate 11 cents at the end of the next year. This is also assuming you never make any withdrawals of this $100.
Banks will then pool all these little $100 from all over Singapore, and lend it out to SMEs at a much higher interest rate. DBS has a fixed asset purchase scheme that charges a min 4.25%. We would assume that this scheme requires the fixed asset to be collateralized, and that it is also a government-assisted scheme, therefore the interest rates should be lower. If the borrowing scheme is not government assisted and/or have no collateral, we will expect interest rates to be much higher than 4.25%.
This means that the Banks will earn the spread of 4.14%.
However, as Singaporeans become savvier with wealth management and as our options online continue to increase, we should look at other investment vehicles as well.
- Earning a higher rate of return
Using three P2P platforms as an example, MoolahSense, Capital Match and Funding Societies provided us with a probable rate of return.
For MoolahSense, they indicated that an investor could expect to earn returns that are determined by investors through an auction process.
For Capital Match, the example they gave was earning a monthly return of 2% This would turn out to be 24% p.a. return on capital at risk or 13.6% p.a. effective return.
For Funding Societies , they indicated that lenders could expect a return of 12% – 16% annual returns, focusing on safer and more stable SMEs.
Although bank savings deposits does not provide high rate of returns, your first SG$50,000 is guaranteed by the Singapore Depository Insurance Corporation, it is very liquid and available as you can access them from almost every part of Singapore via an ATM machine.
In P2P, the risks are that the SMEs will default against the obligations and investors might make losses.
That being said, systems are in placed by these P2P organizations to reduce this probability of default. It would be unintelligent to be known as the P2P organization that always find lousy SME borrowers and tarnish their reputation.
- P2P lending are debt instruments
Unlike investing to own an equity stake, P2P organizations will facilitate the underwriting of contracts for SMEs to be bounded by debt.
As an investor, a debt instrument is more secured as the SME are now obligated to make payments of both interest and principal. Even at the event of winding down of the business, all assets sold will first go to the debt holders (the investors) first and not the equity owners of the SME.
SMEs in Singapore are relatively underfunded as compared to larger enterprises. However, they form the backbone of the Singapore’s economy. Besides depending on Government’s aid and financial institution’s intermediation, we should also seek other funding sources for this sector.
As an investor, you could potentially make higher returns for the same dollar you put in the bank. Of course, the risks are higher. However, this fits perfectly to the concept risk-return theory.
As the P2P industry is still in its infancy stage, we should start monitoring the industry and understand for ourselves if this alternative method could help us make our monies work harder for us.
What do you think of the P2P lending space? Interesting and you feel like knowing more? Let us know what you think.
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