What You Need to Know About Peer-to-Peer Lending in Malaysia
If you’re an entrepreneur or a business owner of a Small and Medium Enterprise (SME) concern in Malaysia, there are somewhat limited options to secure funding for your endeavour especially if you’re a new start-up or your credit rating hasn’t been established (or stellar) to begin with.
You could find an investor or, more likely, attempt to secure a bank loan though both options are fraught with their own particular set of challenges and pitfalls.
Fortunately, there’s now another option on the table for entrepreneurs that has just been approved by the Securities Commission (SC) of Malaysia. Enter peer to peer (P2P) lending.
What is Peer-to-Peer Lending?
While a bank is the preferred and safer option when seeking capital, many startups or businesses who have an awesome business idea or a sound concept but who may not necessarily meet the strict loan criteria of a bank are unable to get funding. This is where P2P lending comes in.
P2P Lending is an alternative way to get capital for SMEs, usually via an online platform that sources funding from multiple potential investors. P2P lending has an established history in other countries though it is a pretty new practice in Malaysia as it was only just approved in 2016 by the Securities Commission with over fifty organisations pitching for the license to run a P2P platform though only half a dozen received approval.
In Malaysia, P2P lending is limited to business-related loans to companies and only six online P2P platforms are currently approved to operate in Malaysia. As of 2018, some of the popular platforms include Fundaztic, Funding Societies, B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, ManagePay Services, and Modalku Ventures.
In a way, P2P lending somewhat akin to taking up a loan with a bank, albeit without a financial institution as a middleman and using a licensed P2P platform as the intermediary.
The key benefit to P2P lending is that it offers an avenue for SMEs who may not quality for traditional bank loans to source funding from multiple investors via the platform.
P2P lending usually also has a much faster approval process that, assuming the paperwork is in order - can be sorted out within weeks instead of months like a traditional financial institution.
In the event that a company secures a loan off a P2P platform, it will have to service the loan by making monthly instalment repayments that include the principal amount and interest charges too until the loan has been completely paid off.
Sounds cool. Wouldn’t that put banks out of business?
Going for P2P lending isn’t exactly a ticket to the land of plenty. While approval processes are faster and the criteria for judging creditworthiness may be different from a bank, the requirements for getting a loan from a P2P platform are still equally rigorous in its own way and has several other caveats.
One particular mechanism with P2P platforms is that a borrower can pitch for any amount to be raised but they can only get it if it meets 80% of the target amount.
An example is if Company A pitches for RM10,000 but it falls short of the target at RM7,000, short of the 80% threshold of RM8000 so they don’t get any of the funds.
If the amount of funds raised on a P2P platform potentially exceeds the target, a borrower only gets the maximum amount that was originally requested. An example of this is if Company A requested an RM10,000 loan. Company A gets over that amount at RM12,000 in potential funding from investors but only gets RM10,000.
Another interesting conundrum is that when a company is pitching for a loan on a P2P platform, they usually have to disclose the relevant aspects of their company including their financial details, their business plan, amount of funding required and the like so that potential investors have a better idea of the risk they are undertaking.
Unfortunately, this requirement for disclosure means that potentially critical data crucial to the company may end up exposed to competitors. No business plan, no dice.
Each P2P platform will also have their own criteria for assessing risk and an interest rate which will likely differ (and likely be higher) from that offered by a bank that is based on their assessment of the borrower. Fortunately, interest rates for P2P platforms can be set to a maximum of 18% per annum by the Securities Commission and the criteria to determine credit scores is disclosed to both borrowers and investors in a transparent fashion.
Another criteria is that P2P platforms in Malaysia can only host pitches from locally registered sole proprietorships, partnerships, private limited, unlisted public companies and incorporated limited liability partnerships.
Sounds risky. Why would someone want to invest in a P2P platform then?
When you invest in a P2P platform, you’re not getting equity or ownership in a borrower’s company but are instead issued an ‘investment note’ that promises monthly repayments.
The benefit to an P2P investor here is the potential for higher returns in exchange for commensurately greater risk as opposed to safer financial instruments from a bank or other established financial institution.
Another advantage with P2P platforms is that it has a lower barrier to entry with some platforms asking investors to pony up just RM50 at the minimum for an investment. As with any potential investment, there is always a certain amount of risk involved.
For investors in Malaysia, P2P platforms are an interesting addition to the line-up of financial instruments that helps them to goes one step further towards a more robust, healthier diversification of risk.
Ready to dip your toes into P2P financing?