Peer-to-peer (P2P) lending is a method of debt financing that enables a company to borrow money and individuals to lend money without using a conventional financial institution as an intermediary.
Investors such as yourself will individually loan some money to a borrower via Funding Societies, our peer-to-peer lending platform. Peer-to-peer lending is open to more than one investor as long as the target loan is filled. We serve as a go-between, facilitating a borrower with their requested financing. With a P2P loan, an SME can use the funds to grow its business. Meanwhile, investors get repayment of their principal plus interest over time. However, as this is a new financial space that had just blossomed, it is important to take note of the risks involved in P2P lending.
Risk (1): Risk of Default
These loans would have higher risk levels compared to other types of business loans done in Singapore as banks are not willing to lend to most of these SMEs.
This could be largely due to (i) lack of historical financial information - business having only operated for <1 year; (ii) businesses that banks are unfamiliar with; (iii) businesses that marginally failed to meet the extremely strict criteria set by the banks.
At Funding Societies, we take a risk-based approach for our FS Scoring Grade in determining the interest rates of each SME loan. We post loans for your investment, only if we have reasonable expectation to believe that the SME and its owners have the capacity and willingness to repay. Amongst creditworthy SMEs, some could comfortably make all monthly repayments regardless of market conditions, while others would still be able to repay the full loan but are susceptible to late payments if there are major changes in market conditions. As per most investments, higher rewards come with higher risk. We assign higher interest rates for the latter SMEs to compensate for the higher risks investors assume.
If a repayment remains unpaid for 90 days past the due date, we consider the loan to be in default. This does not mean that the borrower will never pay, but that the non-payment is serious enough to consider recourse against the borrower.
Risk (2): Lack of transparency in underlying business
When some P2P platform raises money for the businesses, they would put only the industry of which the business (e.g. manufacturing, food & beverage etc.) is in. The name of the business is not provided. This is the same as what is being practiced at Funding Societies.
As contracts can generally only be entered between two known parties, you would only know the name of the SME borrower when you have invested and entered into a loan agreement with the borrower. Prior to that, we are unable to broadcast the identity of the borrowers, as many of them understandably prefer to not advertise their financial needs.
However, we provide a detailed factsheet about our assessment of the SME borrower. It contains the key information you would need to know to make an investment decision. You are also welcome to get in touch with us if you would like to know any further information about a specific SME borrower. We would strive to furnish you with the requested information to our best efforts.
We encourage our investors to diversify across as many loans as possible. Having a well-diversified investment portfolio allows you to enjoy positive returns even after factoring in the default risk.
Singapore is a relatively safe market, with low bad debt ratios as reported in a statement by ASME. Even so, we do not take things for granted. We ensure that all loan applications go through a stringent credit process and we make our best effort to assess creditworthiness of SMEs, their owners, and directors. After loan disbursals, we continue to monitor the SMEs and remind our SMEs every month to ensure timely repayment.
However, default is a risk we cannot eliminate completely. Hence, as is the case with most investments, investors have to bear the risk of default, if all precautions fail. As investors of many loans on our platform, we share the same risks as you. Furthermore, if you are a foreigner investor, you may experience some foreign exchange risks, though it is safe to say that the Singapore Dollar has been a relatively stable currency for investment.