Small and medium enterprises (SMEs) are a major contributor to Malaysia’s economy. According to an OECD report, Malaysia’s micro, small, and medium enterprises (MSMEs) account for approximately 97.2% of total business establishments, generating 38.2% of GDP and providing employment for 7.3 million people as of 2022. However, SMEs tend to struggle with certain issues that are not normally a problem for larger businesses.
One such problem is access to funding. While the government has been taking extensive steps to assist MSMEs with growth and access adequate funding, some businesses have turned to alternative methods of financing to help compensate for this weakness. One such alternate method is P2P lending.
What is P2P lending?
Instead of applying for loans from banks, Peer-to-Peer (P2P) lending offers businesses the option to obtain funding through an online platform in the form of crowdfunding.
If this sounds a little sketchy to you, don’t worry! In 2016, Malaysia became the first country in Southeast Asia (SEA) to regulate P2P platforms in an attempt to help SMEs.
There are numerous P2P lending platforms on the market, and each may offer businesses different types of financing options which organisations can choose from according to their needs, such as invoice financing, working capital financing, general business financing.
Eligibility
In order to qualify for raising funds via P2P lending, businesses will need to meet a certain set of requirements that have been laid out by the Securities Commission (SC). These requirements are as follows:
- Has registered with Companies Commission of Malaysia (SSM) or local authority as one of the following business entities – sole proprietorship, partnership, limited liability partnerships, private limited company, or an unlisted public company.
- Can only host one funding on a P2P lending platform at a time unless the concurrent funding on another P2P lending platform is for different purposes.
Apart from that, certain P2P lending platforms may require a few additional requirements to be met before they approve of certain businesses:
- Minimum shareholding owned by Malaysians
- Minimum paid-up capital
- Minimum months / years of operation
- Minimum annual turnover
How P2P platforms work
P2P lending can usually be accessed from a platform’s respective website. Said websites connect borrowers directly to lenders. Each platform will have its own set of rates and terms to enable transactions. Most sites have a wide range of interest rates based on the creditworthiness of the applicant.
With regards to how money changes hands in a P2P system, firstly, a lender opens an account with the platform and deposits a sum of money to be dispersed in loans. A loan applicant then posts a financial profile that is assigned a risk category that determines the interest rate the applicant will pay.
Following this, the loan applicant can review offers and accept one. Some applicants may choose to break up their requests into different chunks and accept multiple offers. The money transfer and the monthly payments are then handled through the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle. Do note that applicants will only receive money if their money raised hits 80% of the target amount specified. If this minimum is not reached, applicants will have to start over. Any money that exceeds the target amount will be refunded to the lenders.
In order to protect lenders, the Malaysian Securities Commission regulatory framework states that a P2P operator is required to ensure that money obtained from lenders is placed in a trust account until the minimum target amount is met. When an issuer makes repayment to the lender, the P2P operator is also obliged to place the lenders’ money in a trust account. The SC framework also stipulates that the P2P operator must make available all the relevant information to the lender.
P2P lending advantages
Lower interest rates
When compared to banks, P2P lending platforms tend to charge lower interest rates. This is due to a number of factors, but is mainly due to greater competition between lenders and lower origination fees.
Accessibility
The main issue for businesses when it comes to financing and loans is the lack of adequate records and poor credit ratings, especially among MSMEs. This will often lead to many difficulties when applying for a bank loan. P2P lending platforms make funding possible for businesses even without being able to provide complete records of their activities.
No prepayment penalty
While paying off your loan early can be good, some traditional banks impose a penalty if you choose to pay your bank loan off early. With P2P lending, businesses who have obtained a loan are encouraged to make early repayment if possible and there is no prepayment penalty on P2P lending platforms.
Flexibility
Banks often have to follow rigid rules and regulations, which can make it difficult for businesses to get a loan below minimum loan limit. With P2P lending platforms, pre-requisites and eligibility are generally less stringent compared to traditional bank loans, thus allowing businesses to get their target amount approved more easily.
P2P lending disadvantages
Unsuccessful funding
Even if the application on a P2P lending platform gets approved, it does not guarantee the success of the funding. Investors will need to show an interest in what you are offering before putting their money down. At least 80% of the target amount needs to be met within the funding period or else it is considered a failure and has to be done all over again.
Privacy
To facilitate lenders in making funding decisions, most P2P lending platforms require public disclosure of your financial history, business plan and other relevant information. This increased level of transparency helps investors greatly, but also means that businesses seeking funding will lose a degree of anonymity.
P2P lending is not a replacement for traditional business loans offered by banks. However, it serves as a great alternative, especially for smaller scale businesses who may lack the financial history or clout to prove to banks that they are able to repay their loans.
Read More: What You Need To Know About P2P Lending In Malaysia
