Peer-to-peer (P2P) lending is a revolutionary FinTech innovation, with the potential to address the lack of SME financing in Singapore. Since traditional middlemen like bankers aren’t part of the system, it increases profits for investors and convenience for borrowers and small businesses.

Banks’ major financial model has been interest spreads – the difference between what it charges on bank loans and what it offers on your savings. Suppose Anna deposits SGD 100 in a bank, and gets SGD 1.50 per year of interest on it. You, a small growing business, on the other hand, may be charged even up to SGD 20 per year for borrowing SGD 100.

According to P2P lending – What if Anna just lends you the money directly?

Investing in P2P lending is like utilizing an online platform such as eBay. eBay lets buyers and sellers connect and trade goods, bypassing the need for a retailer. P2P lending is quite similar, in the sense that it connects investors and borrowers such as SMEs who need funds for their growth and development.

How it works

Now that we know the basic tenets of P2P lending, let’s see how it works practically.

For the borrower – As most P2P lending platforms in Southeast Asia focus on serving small businesses and SME borrowers, a business would submit a working capital loan application to its chosen P2P lending platform. If the application for financing is approved, a group of retail investors will crowdfund the amount. Later, the borrower will be required to make monthly payments which include principal repayment and interest charges. The best part is that borrowers do not need to provide any collateral, like property and other assets.

Loan applicants may have to provide some key information about their businesses, such as financial information, purpose of funding, a detailed business plan, etc. While loans from traditional institutions may need around 2 months to process, you can obtain working capital from P2P lending within 2 weeks of application.

For the investor – Once your investment account on a P2P lending operator is activated, it is easy to start financing SMEs. For business term financing, you can expect your first repayment a month after the funds have been disbursed to the SME. Depending on the risk profile, you can earn returns up to 14% p.a.

A credible P2P lending platform will perform rigorous scorecard-based risk assessment to minimise the risk involved in investing. For further safeguarding, you can spread your investment across various SMEs to minimise the risk of a particular SME defaulting and taking down your rate of return. With diversification, your returns will stay positive and remain close to the expected rate of return.

In P2P lending, not only are the returns promising, but they’re an instrument that investors can easily understand. In the long run, that can be the most important advantage of all.

This article was written by Funding Societies, Singapore’s leading peer-to-peer (P2P) lending platform. We provide working capital loans for small and medium-sized enterprises (SMEs), along with attractive investment opportunities to the broader public. To learn more about us, click on our website here.