What is Peer-to-Peer (P2P)/Crowdfunding Lending?

The internet has democratised many facets of life. For instance, home and ride sharing apps allow anyone with a phone to rent homes or call private drivers with the click of a button. Similarly, P2P/Crowdfunding lending platforms allow small businesses and individuals to raise funds from a pool of institutional and individual investors. This gives access to a wide variety of funding to those that previously may not have been eligible for traditional bank loans.

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Introduction: What is Peer-to-Peer (P2P)/Crowdfunding Lending?

Crowdfunding is the concept of raising money for a venture, cause, project, or organization, from a large group of individuals. In exchange for funding, individuals that contribute to a crowdfunding campaign are repaid with gifts, products, interest payments or equity shares.

Peer-to-peer refers to interactions between individuals, rather than through a central authority. For example, sharing applications such as Uber or AirBnB allow individuals give share rides or homes with other individuals. This provides income for the owners of the cars and homes, and convenient services for individuals. These services circumvent the hassles of dealing with traditional service providers (e.g. taxis, hotels).

Together, P2P/Crowdfunding lending refers to platforms that raise funding for businesses in exchange for interest payments or equity shares. This typically takes place through online platforms, which act as substitutes for traditional banks. In the case of SMEs, P2P/crowdfunding can be a great alternative to traditional financing methods.

Why Should I Use P2P/Crowdfunding lending?

P2P/Crowdfunding lending gives businesses the ability to raise thousands, or even millions, of dollars. Further, this type of funding increases the accessibility of financing for younger or smaller companies, which might not meet banks' eligibility requirements. Additionally, crowdfunding often offers individualised financing terms catered to each borrower's needs, which allows for flexible loan payment schedules and interest rate structures. For example, various P2P/Crowdfunding platforms in Singapore offer financing options including cash disbursement within 1 business day, financing amounts greater than S$5 million, or tenures as short as 15 days or as long as 3 years.

If this all seems too good to be true, consider why there are willing investors. Crowdfunding gives individuals unique access to high risk/high reward investments in Singapore SMEs for as little as S$100. Additionally, crowdfunding allows investors to diversify their risks across many potentially high growth companies.

Typical Characteristics of P2P/Crowdfunding Financing

Working CapitalAsset PurchaseBusiness LoanEquity
Financing AmountS$5,000 - S$200,000up to S$150,000S$50,000 - S$5 million+S$100,000 - S$25 million
Tenure15 days - 1 year1 - 12 months3 months - 3 yearsIndefinite
Annualised Interest Rates10 - 20%Unknown9 - 15%N/A

Why Should I Avoid Crowdfunding?

While there are many advantages of crowdfunding in comparison to traditional financing, there are also disadvantages that must be carefully considered. First, banks tend to have longer performance track records and lower default rates. This may be preferable for SMEs that are nervous about taking loans from less experienced lenders. Additionally, banks typically charge lower interest rates. Eligible SMEs will likely pay less in interest payments to banks than they would using a P2P/crowdfunding platform.

Finally, most lenders, banks and P2P/crowdfunding alike require private business and financial information to assess the likelihood of repayment. Therefore, due to the public nature of P2P/crowdfunding, this information becomes public to many to investors. SMEs that prefer to maintain privacy may favor financing through a bank.

Typical Characteristics of Bank Loans

Working CapitalAsset PurchaseBusiness Loan
Financing AmountS$70,000 - S$300,000up to 90% of purchase priceup to S$5 million
Tenureup to 5 years3 months - 8 yearsup to 6 years
Annualised Interest Ratesfrom 6.75%from 4.25 - 12.8%4-10%

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