Peer-to-peer lending platforms are good news for SMEs

Peer-to-peer lending platforms, are they better than traditional lenders?

By: Hitesh Shah

Since peer-to-peer lending companies offering these services generally operate online, they can run with lower overhead and provide the service more cheaply than traditional financial institutions.

As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the peer-to-peer lending platforms have taken a fee for providing the match-making platform and credit checking the borrower.

Also known as crowdlending, many peer-to-peer loans are unsecured personal loans, though some of the largest amounts are lent to businesses. Secured loans are sometimes offered by using luxury assets such as jewelry, watches, vintage cars, fine art, buildings, aircraft and other business assets as collateral. They are made to an individual, company or charity.

The interest rates can be set by lenders who compete for the lowest rate on the reverse auction model or fixed by the intermediary company on the basis of an analysis of the borrower’s credit. The lender’s investment in the loan is not normally protected by any government guarantee. On some services, lenders mitigate the risk of bad debt by choosing which borrowers to lend to, and mitigate total risk by diversifying their investments among different borrowers.

Other models involve the Peer-to-peer lending platforms maintaining a separate, ringfenced fund, which pays lenders back in the event the borrower defaults.

The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors or borrowers (either a fixed amount annually or a percentage of the loan amount). Compared to stock markets, peer-to-peer lending platforms tends to have both less volatility and less liquidity.

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Recently, DBS, one of Singapore’s biggest banks, said that they have inked a deal with two peer-to-peer lending platforms to boost funding options for SMEs, assuring that SMEs have alternatives at whatever stage of their growth.

In a statement, DBS said they will refer “smaller businesses that the bank is unable to lend to, to Funding Societies and MoolahSense. In return, the p2p lending platforms will refer borrowers who have completed two successful rounds of fund raising to DBS for larger commercial loans and other financial solutions such as cash management. To safeguard borrowers’ privacy, the bank and p2p lenders will only share information when they have obtained borrowers’ consent in advance”

This collaboration is good news for SMEs as utilising p2p platforms for funding. They can expect to benefit from the wider amount of financial products that banks offer sooner than later, which will involve an opt-in exchange of information between the two entities aimed to facilitate the growth of SMEs beyond the startup stage.

One of the main advantages of person-to-person lending for borrowers can sometimes be better rates than traditional bank rates can offer. The advantages for lenders can be higher returns than obtainable from a savings account or other investments, but subject to risk of loss, unlike a savings account. Interest rates and the methodology for calculating those rates varies among peer-to-peer lending platforms. The interest rates may also have a lower volatility than other investment types.

For investors interested in socially conscious investing, peer-to-peer lending offers the possibility of supporting the attempts of individuals to break free from high-rate debt, assist persons engaged in occupations or activities that are deemed moral and positive to the community, and avoid investment in persons employed in industries deemed immoral or detrimental to community.

In Singapore, some Peer-to-peer lending platforms like MoohlahSense and Funding Societies focus on businesses viability as a result of their crowdfunding model, meaning that if your business proposal is neither convincing nor does it looks profitable, it will likely not pass the application stage.

	MoolahSense	Funding Societies
Loan Tenure	24 months for business loans and as short as 15-90 days for invoice financing	Flexible; 1-12 months for business term loan
Minimum Loan Amount	$20,000 for business loan and S$15,000 for invoice financing loan.	Up to S$3 million
Late Payment	One time fee of S$500 or 3% of arrears whichever is higher to MoolahSense and 30%p.a. (on daily rest basis) to investors. This will start to accrue one day after the due date.	Borrowers of Business Term Loans and Bolt loans are given 7 days grace period from the date the repayment is due. If the borrower fails to make the full repayment within 7 calendar days, a late interest of 0.1% of the outstanding principal per day (from due date) is applied and distributed back to investors for the delay. A late penalty fee is also charged to deter borrowers from paying any later than 7 days from the due date.
Application Fee	S$500-1,000	None
Success Fees	3-5% of amount of funding raised	A service fee is charged
Interest Rates (P.A.)	10% to 20+%	10% to 20+%

Source: MoolahSense, Funding Societies

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But whether it is P2P lending platforms or SME loans offered by financial institutions, the best option available for SMEs to explore sources of additional funds to expand their businesses is to speak to Loan Specialists.

This is because being professionals, Loan Specialists can to compare over hundreds of different SME loan packages to gauge which is the best fit for you. So, if you are in need of funds, talk to us.

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And the good thing – whether it is business expansion loans or mortgage loans – is that all our services are free of charge. So it’s all worth it to secure a loan through us for your business expansion needs.

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