Financing difficulties faced by SMEs today

Here’s a stark truth about
being a Small and Medium Enterprise (SME) in Singapore: it is difficult to
attain financing for your business needs. With SMEs forming the backbone of
Singapore’s economy (99% of Singapore’s enterprises are SMEs while 70% of the
workforce is employed by SMEs), it is reasonable for one to expect for SMEs to
have easy access to financing options. Yet, despite Singapore’s Government
utilising various means and ways to help SMEs grow, it is clear that SMEs face
significant difficulties in securing financial aid.

Companies usually look for
financial institutions such as banks and finance companies when in need of
funds for their business needs; yet, as a result of regulations and
legislation, these companies often find it difficult to obtain the funds they
need. The Monetary Authority of Singapore had
also recently revealed that total bank lending had decreased over the last few
months which shows it will be tougher for SMEs to secure the funds that they
require. So how does P2P lending help solve this issue?

Credit worthy SMEs get funds for growth

With an economic downturn
looming and financial institutions tightening their lending criteria and
reducing the number of loans, SMEs will find it hard to get the loans they need
to finance their business needs. The impending implementation of Basel III will
not help the situation either; as banks will be looking to hold additional
capital against loans to SMEs, which ultimately means less lending to SME.

P2P lending then comes
into play to solve SME’s financing issues, providing
an alternative financing solution to assist these credit worthy SMEs. P2P
lending works by linking up SME borrowers with investors/lenders who crowdfund
into these loans and earn returns from the interest paid by the borrowers. The
process can be broken down into the following steps:

SME looking for
financing applies with P2P lender

SME is then
subjected to credit assessments, to ensure they have the financial strength and
repayment ability to service the loan

Once approved, loan
is put up on platform for investors/lenders to crowdfund into

Once crowdfunded,
P2P platform will facilitate the underwriting of the loan contract

Funds are then
disbursed to the SMEs as a loan

With the application and
approval process estimated at around 4-5 days, P2P as a financing option can be
obtained much faster than typical loans from banks and financial institutions,
which can possibly take weeks.

What does this mean for investors?

For investors, this is an
excellent alternative source of income. With attractive interest rates much
higher than bank or fixed deposits, investors will be wise to start exploring
P2P lending as an alternative investment opportunity. Take for example, Funding Societies, which uses an escrow
account to manage investors’ funds (to ensure their safety). The average rate
of return ranges between 10% to 15% for the loans crowdfunded so far and they
have had no defaults to date, indicating the astuteness of their credit
assessment process.

Since investors are not
only able to earn solid returns through P2P lending and are able to provide
much needed assistance to underfunded SMEs, they should definitely consider
having P2P lending as part of their investment portfolio.