According to a recent study by Deloitte and Visa, around 55% of SMEs in Malaysia need more capital to grow. Moreover, 58% of them decided to put off their financing proposals because they lack the bank requirements. Yet the bank funds available are not enough to cover the national need for more financing. Local SMEs need alternative sources of capital.
Peer-to-peer financing is the answer. As a non-bank alternative, P2P financing offers quick capital for SMEs. Since many P2P financing companies offer entirely online services, SMEs can use financial services faster and more easily compared to traditional financial products.
What is Peer-to-Peer (P2P) Financing?
Peer-to-peer (P2P) financing is a method of raising funds that enables individuals and businesses to request funds and invest money via a digital platform as intermediary. The issuer will offer an investment opportunity to the investors. An interested investor will then invest his money. When the target funding is achieved, the offering is closed and the funding will be given to the issuer. Usually the issuer will use his P2P funds to grow his business. In return, investors will receive repayment plus interest.
Typical characteristics of peer-to-peer financing include:
- Usually conducted for profit (for a project or a company);
- No necessary common bond between issuers and investors;
- Intermediated by a P2P financing company;
- Online transaction; and
- Investors can choose which issuer to invest in.
The key difference between P2P financing and traditional bank funding is the source of funds. Banks fund loans from their own finances (from bank clients in the form of savings, deposits, etc). Meanwhile, P2P financing utilizes funds from the platform’s investors. The P2P platform simply acts as an intermediary.
Benefits of P2P Financing for Issuer and Investors
The benefits of P2P Financing for issuers are many. It includes ease of application and funding speed.
Easy application – Bank financing tends 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 financing, on the other hand, is online-based. You can finish and send off an application even within a few minutes.
Quick funding – Traditional financing products can require 1-2 months of waiting for notification approval. P2P financing normally takes one to three weeks to fulfil your loan, depending on the size of your loan.
However, benefits are not only applied to issuers. Investors also earn good returns and freedom of choice from P2P financing.
High returns – Depending on the agreed-on interest, investing in a number of issuers will earn you high returns, often higher than traditional investments like bonds.
Free to choose – It’s up to the investors who to lend to. They can choose any company they are interested in or a business they have researched into and feel safe in. Investors are typically given a guide by the P2P financing platform, consisting of an issuer’s interest rates, risk scores, and other related factors in their funding algorithm to help them decide whether or not they should invest in an issuer.
What do you think? Is P2P financing the best choice for your growing SME? The choice is yours whether you are interested in being an investor or an issuer.