SME lending, commonly done through peer-to-peer (P2P) financing platforms, allows individuals to invest in companies of their choice, via short-term loans that typically last no longer than 12 months. While relatively new to Southeast Asian markets, P2P lending to SMEs has been around long enough that it’s now well regulated in most jurisdictions.
In Singapore, P2P platforms are under the watch of the Monetary Authority of Singapore (MAS). Some platforms, like Validus Capital, only work with accredited investors, and provide insurance for capital protection, use escrow accounts, and thoroughly vet all borrowers.
P2P lending to SMEs has a number of traits that make it well adapted to the current situation:
- Low correlation to conventional stock and bond markets
- Better returns than conventional bonds
- Allows for diversification
- Short loan tenures to retain liquidity
- Simpler and more transparent than many other alternatives
- SME borrowers are well supported in Singapore
Low correlation to volatile stock markets
SME lending is not directly tied to public markets. This allows investors to sidestep the volatility introduced by Covid-19 while still getting market plus returns. Loans to SMEs will not, for example, be affected by the sentiments of retail investors, which can cause stock values to plummet upon a single adverse news report.
Better returns than conventional instruments such as bonds
SME lending can provide attractive risk-adjusted returns, depending on the financing platform. On the Validus platform, this can range from 8% to 12% per annum. As with other debt instruments, investors receive an absolute return rather than variable returns based on a benchmark.
Allows for diversification
For many P2P platforms that offer SME lending, the minimum investment amount in each company is low; often just $1,000. This makes it easy to spread risk across a range of SME loan products, as well as to spread risk across multiple companies with low correlation in different sectors. This ensures that your portfolio is not significantly impaired by the failure of any one company.
Short loan tenures to ensure flexibility
Crisis situations like Covid-19 also present opportunities if you have a well-managed portfolio. Because P2P loans to SMEs are of very short duration (30 days to 12 months), you retain the flexibility to take advantage of these.
Shorter-term loans also make P2P lending more attractive to SME borrowers, as approval times are quicker (often within 24 hours), and the loan quantum can be smaller (banks seldom find it viable to provide small loans such as $25,000 or under, which SMEs often require on short notice). This, in turn, means investors have a constant stream of new opportunities to create passive income.
Simpler and more transparent than many other alternatives
P2P lending is one of many within a diverse range of alternative asset classes outside of conventional stocks and bonds. However, it may be the most transparent and the simplest to understand.
Other alternatives may be on the exotic side—think wine, fine art, or stamps. These are opaque to non-collectors, or may be so complex they end up involving just as much risk as conventional markets anyway. In addition, liquidity becomes an interesting obstacle where valuation of these alternatives is often complex and subjective.
In contrast, SME lending is straightforward: lend to a company and get back your principal with interest. It’s simple enough that you can manage the investment just over a smartphone, in a matter of minutes. Validus offers transparent, flat fees with no lock-in requirements, as well as an optional auto-invest feature to save you time.
SME borrowers are well supported in Singapore
The Singapore government is highly supportive of SMEs, having already allocated some $4 billion to support them amid the Covid-19 outbreak. The government has even passed regulations requiring some commercial landlords to pass on rental rebates in order to support local business. In addition, wage support schemes are in place to help SMEs cope with payroll costs.
This support creates an environment in which many SMEs have the working capital to maintain adequate cash flow but seek financing for growth, oftentimes specifically around trade financing.
Pandemic & P2P
As we expect to see an increase in economic activity post Covid-19, many SMEs will require cash loans to restart their business, or to finance purchases from new suppliers. As such, SME loans through P2P platforms will be an attractive, faster option for these SMEs. This represents an opportunity for investors and small businesses alike.
As such, it’s the appropriate time for investors as well as wealth management professionals to take a closer look at P2P lending as an emerging asset class, and examine its unique advantages in a post-Covid 19 economy.
This article has been written exclusively by Milena Naitoh, Head of Investor Relations & Corporate Development at Validus Capital.
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