Financing your business – P2P lenders or bank loans?

Credits: Yon Heong Tung, e27 © Reproduced with permission.

Building a business is not an endeavour for the faint-hearted – or one who is hopeless at numbers. Among the many obstacles a business faces in its growth, achieving positive cashflow and staying afloat are of chief concerns.

For young enterprises, getting a traditional business bank loan may seem like an uphill task. Banks, unlike investors, have to be prudent when making financing decisions as they use depositors’ funds, while individual investors can make their own investment decisions based on individual risks.

In recent years, high Internet penetration has spurred new innovations in the financial sector. Among these new business products include P2P lending platforms – online services that facilitate lending to SMEs. Unlike banks, they do not loan money out themselves but rather connect borrowers to potential borrowers.

e27 speaks to two Singapore-based P2P lending platforms MoolahSense and Funding Societies – both which recently partnered with DBS Bank, Southeast Asia’s largest bank – to find out how their services can be a complement to mainstream financing options.

Augmenting bank loan options

According to Kelvin Teo, Co-founder of Funding Societies, P2P lending platforms can offer SMEs an additional avenue for loans, and afford more flexibility for issuing of loans compared to banks as they target a wider customer segment.

“There are two target segments. Firstly, it’s the non-bankable SMEs with younger credit history, imperfect financial record or little collateral. Secondly, it’s the bankable SMEs with existing bank loans, but are looking for more loans,” says Teo.

“We serve these segments because we focus on SMEs’ cashflow, while banks concentrate on SMEs’ assets to determine ability to repay. Similarly, we look at both hard and soft data to evaluate willingness to repay, while banks rely more on credit record,” he adds.

Lawrence Yong, CEO of MoolahSense, echoes Teo’s statements, saying that most bank lending may be constrained by various factors being set in their credit policies.

P2P lending platforms are able to offer short term and flexible repayment structures that better target SME cashflow profiles, says Yong.

The turnaround time for loan requests on P2P lending platforms is also more timely.

Both Teo and Yong say the online nature of these platforms allow credit assessments to be made quickly – shortening the application process time.

“Time is one of the most precious assets for SME owners; quick credit decision and funding gives them a peace of mind. As we are [an] SME too, we hope to help SMEs and fill the financing gap,” says Teo.

More flexibility; but more scrutiny

That is not to say P2P lending platforms are laissez-faire in dishing out loans. The criteria are flexible, yet at some level more stringent than banks.

Because P2P lending platforms do not require collateral from the SMEs and accept softer data such as site visit for credit assessment, the businesses are subjected to more scrutiny.

“As we are more flexible with evidence and target segment, we have to be more stringent in our credit assessment to protect investors’ monies. Hence at some level, we request for more documents than banks. This evidence would go through our proprietary credit assessment process, complemented by third party credit data to arrive at a credit decision,” says Teo.

“Investors on our platform are the final arbiter of risks, they are able to review the profiles of each issuer and their associated rate of returns before determining if the risk-reward is justified,” Yong adds.

Complement; not replace

The rise of P2P lending platforms does not mean that banks are going to be replaced; rather, these new services act as complements, offering SMEs more flexibility of financing options.

“We best serve as a complement to banks, given the different customer segment and limitation of crowdfunding. When our SMEs grow bigger, it’s more suitable for them to turn to banks for bigger loans at lower interest rates. We’re here to fill a financing gap, as evident by our recently inked partnership with DBS,” says Teo.

Yong agrees, saying P2P lending platforms “are different players in the financing ecosystem, and add depth and diversity to it.”

Banks also provide a value proposition not available in the new P2P lending platform industry – the currency of trust and expertise in the financial world.

With their experience, banks can offer valuable help to SMEs on optimising their cash flow, managing financial risks and how to do business across borders.

Banks can provide essential regional connections to support smooth cash flow management and facilitate SMEs' business transactions. In addition, a bank’s backing improves credit worthiness, opening the way for future easier loans.

Conclusion

For young SMEs, going the route of P2P lending platforms to get loans would be a real alternative. But once they have hit a certain level of growth, it would be necessary to count on banks to take the company to the next stage of maturity. Check out our commercial loan calculator to get an idea of your bank loan affordability.