Types of P2P Lending
P2P lending has certainly evolved since its early days of crowdsourcing loans from lenders who have personal connections to borrowers.
Nowadays, the scope and depth of P2P lending has grown to include HNWIs, banks, and other financial institutions looking to participate in crowdfunding. There are several market segments to which P2P lending caters:
Consumer lending
P2P lending initially began as a way for consumers to borrow money at favourable interest rates to pay off student, credit card, and personal loans. P2P platforms that orchestrate consumer lending will typically have the consumers’ personal data and rank them based on the likelihood of repaying their loan.
Property lending
Property lending is similar to consumer lending with regards to the consumer acting as the borrower, except that consumers will use the loans to pay off their mortgages and residential developments. However, property lending is more secure than consumer lending as P2P platforms can repossess and sell the property should the borrower fail to repay the loan.
SME business lending
SMEs can also borrow money to raise extra funds via several means—such as invoice financing, purchase order financing, and working capital loan. In recent years, P2P lending has become one of the drivers for SME growth in Southeast Asia (SEA) and serve as a source of capital for sustaining and growing SME businesses.
There are more than 70 million SMEs in SEA, accounting for 89% to 99% of all businesses and employing over 140 million people. Not to mention, these SMEs contribute between 30% and 53% to each of these SEA countries’ Gross Domestic Product.
Yet, there is insufficient financial backing for the SMEs. Last year’s global trade financing gap stood at around S$1.5 trillion, with over 40% coming from the APAC region and over 74% attributable to the SME segment. Banks had also rejected 45% of SMEs finance applications, posing considerable barriers to working capital.
Consequently, SMEs have looked elsewhere for sources of funding for their businesses. P2P lending platforms have provided an alternative financing option for these underbanked SMEs while acting as a viable investment opportunity for HNWIs.