Peer-to-Peer Lending: An Alternative SME Financing Source

An SME needs working capital to grow bigger. According to a Visa and Deloitte Digital SME Banking Study, about six in 10 small and medium-sized enterprises (SMEs) in Singapore rely on bank loans for financing, leaving the other four in 10 unserved by financial institutions. There is therefore a pressing demand for an alternative source of SME financing.

Peer-to-peer (P2P) lending can be the solution to the SME financing problem. The loans provided can help SMEs build their businesses to the next level quicker and easier than traditional loan products.

What is peer-to-peer (P2P) lending?

Peer-to-peer (P2P) lending is a method of debt financing that enables a company (or individuals) to borrow and lend money without using a conventional financial institution as an intermediary. In short, borrowers and lenders will be brought together, bypassing traditional banks. The third party in P2P lending is typically an online platform that facilitates the financing activities. Borrowers request their needed credit along with their target loan size to the platform. If the platform considers a borrower worthy of getting a loan, investors (also called lenders) will then pool together their funds to achieve the amount needed by the borrower.

Lenders will generate income because they will get loan repayment plus interest. While lenders do get good returns from their investment, borrowers get easier financial access that they may not have when getting loans by standard financial intermediaries. P2P Lending also has added benefits for borrowers; the P2P process is fast, online-based, and easy – helpful for SMEs, as they often need capital fast and cannot wait for approval notification delays.

Benefits of P2P lending for SME owners

The benefits of P2P Lending for SME owners are plenty.

Easy application: Bank loans tend to ask for far more information and document submissions, while approval notifications can take a while when you can’t afford delays in getting financial support. P2P lending, on the other hand, is online-based. You can finish and send off an application even within a few minutes.

Quick funding: Traditional loan products can require 1-2 months of waiting for notification approval. P2P lending normally takes one to three weeks to fulfil your loan, depending on the size of your loan.

However, benefits are not only applied to SME owners. Investors also earn good returns and freedom of choice from P2P Lending.

Benefits of P2P lending for investors

High returns: Depending on the loan interest, investing in a number of borrowers will earn you high interest returns, sometimes even higher than traditional investments like bonds.

Freedom of choice: Investors can invest in any company they are interested in or a business they have researched into. Investors are typically given a loan fact sheet by the P2P Lending platform, consisting of a borrower’s interest rates, risk related to the loan, credit scores, and other related factors in their funding algorithm to help them decide whether or not they should invest in a borrower.

Interested in borrowing or lending with P2P lending? The choice is yours!

Related: FinTech as Digital Solutions for SMEs