Peer-to-peer lending, also known as P2P lending, is a type of debt financing through which you can lend and borrow money directly from non-banking sources, without an intermediary like a financial institution. This mostly comes in the form of an unsecured loan.
Singapore has a number of P2P lenders who offer money to people looking to borrow money for business capital. Some of the top lenders in the country include:
Peer-to-peer lending has a lot to offer both, the borrower as well as the lender. The following is a list of what you stand to gain as a lender or a borrower:
For a borrower:
For a lender:
There are, essentially, two types of peer-to-peer lending:
P2P Lending (lending-based crowdfunding): This is a model in which you can source money for your business from various lenders, in return for a legal commitment on your behalf to repay the loan within a stipulated time along with the agreed interest rates. This is usually conducted online.
Equity-based crowdfunding: In this model, you get the funds you need from investors in return for shares (equity) in your company. The investors have partial ownership of your company and their returns are linked to how well your company does. Previously funded only by the wealthy, this form of lending is now becoming popular with others as well.
If you want to borrow a business loan through the traditional funding methods, you would ideally approach a bank and submit an application for the same. The bank will then take you through a possibly long, drawn-out process of verifying your documents, checking your credit history, and verifying all other relevant details before they decide whether or not to grant you a loan. After this comes the stage where they calculate what amount of loan to grant you, how much interest to charge, and what your repayment period and schedule should be, amongst other parameters. This could not only take time, it may not give you exactly what you’re looking for either.
The P2P platform works along the same lines, but with a lot more flexibility for both lenders and borrowers. As a borrower, you would take loans from investors individually. Investors, if they are looking to invest in your business, will be able to assess your creditworthiness and their own risk levels based on your ‘borrower profile’ that will be available on a P2P platform online. In case a single investor is not able to provide the whole loan or chooses to fund only a part of it, you may be able to get the rest of the money from another investor or a group of them. This is one of the features of peer-to-peer lending wherein a single loan may have multiple sources. One of the main features of this type of borrowing and lending is the interest rates. These are higher than the rates that you as an investor would get if you were to put your money into a savings bank account. If you are a borrower, these rates are usually lower than the personal loan interest rates normally charged by a bank. In addition to this, you would also get funds that banks may be reluctant to offer.
In Southeast Asia, the year 2016 showed that the majority of the market activity totalling US$115.01 million was generated by money movement on the P2P platform. In Singapore, peer-to-peer lending is showing a growing trend and the country is expected to become Asia’s centre for this platform due to its direct approach. Being a leading centre for wealth protection and trading, combined with its strong startup ecosystem, and its reputation as a leading technological and financial hub, Singapore is growing every day in this sector. Given the fact that a good amount of borrowing and lending transactions in Singapore are done without using the traditional banking systems, it makes it all the more convenient for the P2P lending sector to grow.
In Singapore, P2P lending is also called Lending-Based Crowdfunding (LBC) by the Monetary Authority of Singapore (MAS). MAS, through the Securities and Futures Act (Cap. 289) (SFA) and the Financial Advisers Act (Cap. 110) (FAA), regulates the borrowing and lending done through this public platform. Lending-Based Crowdfunding and P2P lending bear the same meaning and can be used interchangeably. However, there’s a subtle difference between LBC/P2P lending and normal crowdfunding, which is also gaining popularity. P2P also has professional companies that lend money to borrowers, whereas crowdfunding is a public channel through which borrowers ask the general public for money to fund their projects.
The concept of P2P lending sounds great, shows a lot of promise, and helps you raise the capital you need to fund your business. But as a borrower, there are a few things you need to keep in mind before you borrow or after you have borrowed money via this platform.
The rates of interest charged on the P2P platforms depend on what the investors charge on the loans they give. Peer-to-peer platforms may also charge other fees for their services. Some of the fees charged by leading institutions in this sector are explained below:
These rates may change from time to time, at the discretion of the P2P lender. Check with them before you apply for funds.
From the perspectives of both lenders and borrowers, lending-based crowdfunding just might be a great option in the following situations:
You don’t want to involve intermediaries: Traditional channels of funding (banks and financial institutions) involve intermediaries who usually charge fees for the services they provide. Additionally, they may also have their processes for verification, documentation, and other requirements which may prolong your loan sanction period.
When banks don’t offer funds: Attempting to get loans through banking channels can sometimes prove to be fruitless, mostly because they may require additional security, documents, or simply because they are not satisfied with your credit rating. In such cases, crowdfunding can be a better option.
When you want faster funds: P2P lending is usually a much faster way of getting the funds you need, since it eliminates intermediaries and unwanted processes between your loan application and loan sanction. Also, you get easier access to capital because of the online funding platform.
You need perspective from other entrepreneurs: One of the best features of the P2P platform is that you get great advice and tips from people who have their businesses. These are people who have “been there, done that”, and their ideas and inputs can actually tell you whether your business idea is a feasible and sustainable one or not.
You want to build a customer base: Crowdfunding is also a great way to build a good customer base. This happens because you get to pitch your idea to a large number of people online, thereby attracting both potential investors, and customers at the same time, helping you build contacts, and future customers.
When you want to pre-sell: “Pre-selling” is a concept where you can raise funds by selling your products even before it hits the market. Customers buy your product at a special price, which helps you fund your project. You ship out the product to your “early” customers when it’s ready.
When you want to diversify investment risks: This is from a lender’s perspective. As an investor, you would want to minimise your risks as much as possible while looking to get good returns on your investments. The crowdfunding platform helps you do exactly this by allowing you to invest small amounts in multiple projects.
Long story short, you need funds. That’s precisely why you’re looking to borrow, and why you’re reading this. The aim here, is to make sure that you get the funds you are looking for, while not making it look like you’re desperately in need at the same time. The following pointers may help you get what you need, when you need it, and at a reasonable cost.
Think like a lender: Step number one, think like a lender. What would motivate you to invest money into a business? What are the key points you would look for? What returns are you looking for? Adopting the mindset of an investor will help you plan your ‘sales pitch’ well.
Make a captivating ‘sales pitch’: Sales is driven by attraction, period. The more attractive your idea looks, the more investors you are likely to get. Make sure that you present your idea well to your investors. Showcase your strengths, explain why your idea is good and viable, show that you have the capacity to repay your investors on time, every time. At the same time, admit your weaknesses. There’s nothing like being honest about who you are and what your vulnerabilities are. This way, investors are more likely to understand that they can trust you with their money.
Give detailed explanations without mistakes: Mistakes are a big ‘no-no’ when you’re trying to convince people to give you their money. And it’s very important to make sure that you explain your business model in the best possible way, including all of the crucial information. It’s quite possible that there may be mistakes in your presentation. There’s only one remedy to this – check and recheck what you tell your investors. And then check once more, just in case. A well-structured, engaging, and faultless sales pitch just might get you the funds you want.
Leave out the desperation: In all probability, you might be desperate for capital to fuel your business. But it’s not necessary that you should show that to your investors. Rather than looking desperate, present yourself as a strong and capable individual (or enterprise) who needs a little help to get his business going. Investors like to invest in people who appear responsible, strong-willed, and focussed on their priorities.
Show realistic returns: One of the mistakes most borrowing entrepreneurs make is showing inflated figures for returns on investment. Investors are put off by such tactics because most of them are businessmen themselves and have a fair idea of how much they can expect to get back from you and within what time frame. When you present returns figures and time periods, do your research well and give your investors realistic numbers instead of inflating them. Again, honesty is the best way to go about a business proposition.
Borrowing money is easy, paying it back - not quite as much. It always puts you in a position where you are obligated to your investors. While no one’s standing with a gun to your head, it is imperative that you pay back what you borrow according to what you promise your investors.
Borrow only what you need: Always remember that there is a huge difference between what you “want” and what you “need”. A “need” is what you require. Anything more than that is a “want”. And when it comes to borrowing money, it’s always safest to borrow only to the extent of your need. Analyse how much money you need to fund your business, and borrow only that much. This will help repayment easier and more affordable.
Set ideal repayment tenures: True, you want to and have to repay your loan as soon as possible. But a short tenure can mean higher repayments every month, which may be too much for you to bear. A long tenure on the other hand can keep you obligated to your investors for a long time. Always set an ideal tenure that will make repayments comfortable.
If you can repay more, do it: At any point during the repayment tenure, if you come across excess funds, you can use it to repay more and knock off a few weeks or even months off your repayment period.
Manage your finances well: This is probably the most important aspect of any business. How you manage your finances will either make or break your business. Resist the urge to splurge, even if it is for business purposes. Identify your immediate needs and spend on them. Long-term needs can wait. Build your finances and demarcate funds for each need. This will help you set apart money for repaying your investors.
Be aware of your timeline: This is the next most important criteria to keep in mind. Along with managing finances, also make sure that you manage your time well. Keep timelines in mind, keep reminders for making payments, and ensure you stick to them.
Like any other loan, a peer-to-peer loan should also be repaid on time, as per the agreement with the investors. Not repaying the loan at regular intervals as agreed can have serious consequences in the future. Lenders will usually send you reminders on when you have to make your scheduled payments. If you continue to keep amounts unpaid, it may indicate that your company is going through financial troubles, thus making it a sensitive situation where other lenders will also get to know of your financial instability.
In the lending-based crowdfunding sector, it is imperative that you make your repayments on time, every time. After all, lenders are not giving you their money out of charity. They expect returns on a regular basis. Not paying your dues on time can prevent you from getting similar loans even if you need them desperately at a later date. Defaulting on your P2P loan repayments will make other lenders wary of lending you money because they know you are not a safe bet to invest in. Another drawback of not paying your loans back on time is that it severely affects your credit score. A credit score is like a financial report card that tells investors, banks, and any other financial institutions about the risk involved in giving you money. Defaulting on repayments can adversely affect your score, making it extremely difficult or even impossible to get loans in the future.
How successful has the LBC platform been in Singapore? Let’s take a look at the real-life stories of a few companies in Singapore that have made their businesses bloom using funds that they obtained through the P2P platform.
Olive Green: Olive Green is a company that manufactures and sells bioplastic products such as carrier bags, disposable tableware, and other packaging material based on corn starch. The Managing Director of the company approached a P2P platform to get the funds he needed to extend a particular range of products. Within a span of 3 days, the P2P platform vetted his financial status, risk levels, and sent his ‘borrower’s profile’ to about 2,500 potential investors. Within 12 days from when these details were sent out, the company received all the money it had applied for. The MD made sure that loans were paid back on time and at the agreed interest rates. When the company applied for another loan through this platform a few months later, the request was fully funded in less than 3 hours because the investors were happy with how the company handled their money the first time around. Today, the company is running successfully, thanks in a major part to the funding it received through the LBC platform.
Meggnify: Meggnify is an app developer for mobile phones, started by a young businesswoman, Li Yanyan. She did not qualify for a business loan because she was only starting her business at the time. Having been granted funds through a P2P programme, she used the S$25,000 she got to pay for app development, to pay salaries, and to cover other expenses. This funding helped her get the finances she needed to make her company grow, helping other businesses acquire data at a fast pace. Li Yanyan hasn’t looked back since, with her company now being one of the biggest and fastest growing names in the industry.
Apart from these two, there are hundreds of other smaller and larger businesses that have flourished and grown due to funds obtained from the LBC platform.
If you want to invest your money into a field that will minimise your risks and maximise your returns, the P2P platform is the way to go. Here are a few points on what you need to know as an investor:
P2P lending is regulated by MAS: Not only does this platform give you good returns for the money you invest, the fact that this field of financing in Singapore is regulated by the MAS also gives you that extra bit of guarantee that you’re not putting your money into something uncertain.
You decide your investment: Over the years, this method of financing has grown in strength, with more and more people investing money into this platform. As an investor, you get to choose where you want to invest. You can pick and choose the projects that interest you and invest in them. You also have the freedom of investing as much as you want or even amounts as small as S$100. What this does for you is to reduce your risk since you are investing only a small amount. Or if you want to invest more, you can invest small amounts in multiple businesses, thereby diversifying your risk.
Vet the borrowers before you invest: This is probably one of the best features of this platform. Each of the people wanting to borrow on an LBC platform will have to provide their financial and other details. The platform then does the necessary checks to formulate a ‘borrower profile’ for each of the borrowers. This profile gives you all the pertinent details of each borrower, making sure that you have all the information you need to assess the creditworthiness and risk profile of each borrower.
Get better returns than bank deposits: As a lender, you are bound to get returns higher than the interest rates offered by banks for bank deposits. You get to check the viability of each project presented to you and see what you stand to gain from it. You may also be able to negotiate the interest rates you want to get if you choose to invest in certain borrowers.
Get regular returns: All P2P lending is based on returns. The borrower is obligated to repay the money you lend him, at regular intervals as agreed at the time of granting the loan. This gives you regular returns on your investment.
All LBC activities in the country come under the regulatory purview of the Singapore government. Companies that provide the platform for lenders to offer their money to borrowers have to register themselves with the MAS and get their Capital Markets Services license authorising them to operate such a platform. In order to give this license, the Monetary Authority of Singapore takes into consideration the management expertise, financial track record and soundness of the company, internal compliance structure, business projections and plans, and the propriety of the company, among others. There are other criteria and procedures to be followed in order to get the CMS license. For complete details on how to get it and the various criteria attached to it, check out this link.
Yes, investing in something that gives you good returns is very exciting and sounds like a fool-proof option. But just because you have money doesn’t mean you should simply hand it out to anyone who asks you for it. A lot goes into deciding whom to give your money to. There are many borrowers who are waiting for a lender to give them money. So then how do you decide whom to give your money to?
Always be cautious: Take everything with a pinch of salt. Never assume that a project you want to invest your money into will be successful right away. Sometimes it may not be successful at all. Exercise caution when it comes to investing your funds. Choose multiple options to minimise your risks.
Study the borrower’s profile: The profile of every borrower on the platform is usually available online, complete with all the financial history, credit rating, and other such related information. Studying a particular borrower’s profile will give you an idea of how sure you are to get returns as agreed.
Go through the business plan thoroughly: Every borrower is required to make a business plan and present it to potential investors. This is how they hope to garner the capital they need to fund their operations. A good business plan will have complete financial details, along with details of the product or service, development plans, date of market release, repayment schedule of borrowed loans, and many other such relevant information. Going through the business plan will help you decide whether it will give you the promised returns or not.
Choose favourable tenures and rates: Analyse your own need before you invest. What are you looking for, a short-term investment or a long-term one? How soon do you want to get returns? Based on these criteria, choose to invest in projects that have favourable tenures and interest rates.
Investing wisely will definitely help you get better returns when compared to investing in random businesses. Take some time, do your research well, understand the business plan of the projects you want to invest in, and only then lend your money to borrowers.
When you lend money to others, there is always the risk that they will not pay back what they owe you, or not give you the interest amounts that you’re due. So then how can you be sure of getting your money back? While there is no fool-proof solution, you can always take certain precautions to minimise your risks.
One of the best ways is to identify borrowers who may default on their repayments. Now how can you do this when you don’t know them personally? The best way is to refer to the borrower profile of the person you want to lend money to. This profile will tell you everything you need to know about the financial history of the person, his creditworthiness, and his past history of handling loans (from his credit rating). This should give you a fair idea of whether that person is a potential defaulter or not. A good credit score means that the borrower makes prompt payments as and when they fall due. Investing in such a person could keep your money safe. On the other hand, a person with a bad credit score is someone you need to keep an eye on. You don’t want someone who is not financially responsible when handling your money. So even if such an individual has a really good business model and idea, we would advise you to exercise caution when investing in such a business.
No matter how many precautions you take, you still might run into borrowers who may fail to make their payments on time. That’s just how the world of business is. But what happens when borrowers fail to return your money as and when the instalments fall due? Does it mean you lose your money and there’s no way to get it back? Not necessarily. Since you are transacting on a valid platform, it minimises the possibility that borrowers will default on their repayments. In addition to this, many of the P2P platforms in Singapore state that lenders who give money through them are safe due to their guarantee of complete money recovery. LBC platforms often follow the same procedures adopted by banks to recover bad debts.
Q. Is P2P lending and borrowing available to all?
A. Yes, the P2P platform is open to all people who want to start their own businesses or want additional funds for their business ventures, or want to invest in such companies.
Q. Is the P2P platform completely free from risk?
A. No. Any form of investment always has a certain element of risk attached to it. You can, however, minimise your risk by diversifying your investments. Also, it’s not necessary that there definitely will be a risk involved.
Q. Is it wise to invest my savings into a P2P platform?
A. We strongly suggest that you exercise caution when using your savings on this platform due to the risks involved. IT is advisable to only invest the money that you can spare.
Q. Is there a fixed rate of return that I will get if I invest?
A. No. The rate of return depends on your agreement with the borrower. Some platforms may have a fixed rate that they offer you irrespective of what the borrower offers.
Q. If I apply for funds through this platform, am I guaranteed the funds I want?
A. Not always. How much money you get depends on how well you present your business model, your credit score, your borrower’s profile, and other such relevant information.
Q. I have a bad credit score. Can I still apply for a P2P loan?
A. While your credit score does have a massive impact on whether or not you get a loan, you can still apply. If your business plan is good enough, you may still get funds.