SME Digital Financing: An Alternative Source of Capital for SMEs

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.

SME digital financing is the answer. As an alternative to bank financing, SME digital financing offers quick capital for SMEs. Since many digital financing companies offer entirely online services, SMEs can have quicker and easier access to business financing as compared to traditional financial products.

What is SME Digital Financing?

SME digital financing is a method of raising funds that enables individuals and businesses to request funds and invest money via a digital platform as the 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 funds to grow his business. In return, investors will receive repayment plus interest.

Typical characteristics of SME digital financing include:

• Usually conducted for profit (for a project or a company);
• No necessary common bond between issuers and investors;
• Intermediated by a digital financing company;
• Online transaction; and
• Investors can choose which issuer to invest in.

The key difference between digital 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, digital financing utilizes funds from the platform’s investors. The digital financing platform simply acts as an intermediary.

Benefits of digital financing for SME owners

The benefits digital 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. Digital 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. Digital financing takes typically one to three weeks to fulfil your loan, depending on the size of your loan.

Related: 4 Reasons Why SMEs Should Consider Digital Financing

Benefits of SME Digital Financing for Investors

However, benefits are not only applied to issuers. Investors also earn good returns and freedom of choice from digital 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 digital 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.

Related: 4 Keys to Success When Investing in SME Digital Financing