P2P Lending: A new age of SME finance

Peer-to-peer (P2P) finance is built on the ‘power of the crowd,’ a principle of raising finance from a number of people who pool their resources together. Craig Moore explains a ready and alternative source of SME finance.

Untitled-1The past few years have seen a surge in research, organizations and events dedicated to the small to medium sized enterprise (SME) space and the essential roles SMEs play in a nation’s economic fabric. The part SMEs play in advancing innovation, growth and prosperity has rallied stakeholders and raised awareness of the importance of the sector, but more than anything, this newfound interest in SMEs has highlighted the significant challenges they face.

Chief among those challenges remains access to capital. In the UAE and the wider Middle East region, many small businesses are simply unable to access favourable financing terms or secure Untitled-2reasonable credit terms in a timely manner. The difficulty in applying for financing from banks, their fees and the rates they charge all make traditional financing prohibitive for most small businesses.

This severely impedes SMEs’ ability to grow, expand and reach their potential, with negative consequences for economic growth, innovation, and macro-economic robustness.

With banks and other conventional lenders reluctant to take chances on small-business loans, numerous reports have highlighted the fact that this gap is largely the result of a mismatch between the needs of small businesses and the supply of financial services, which are easily accessed by larger firms.

This is even more pronounced in emerging markets. Dubai has a healthy SME sector accounting for around 40% of GDP, over 42% of the total workforce and 95% of businesses operating in the emirate, according to the UAE Department of Economic Development. Yet while they form the backbone of the economy, SMEs still suffer from a lack of funding options that give them the credit they need with suitable terms. This is supported by the International Finance Corporation’s (IFC) estimate that the current SME funding gap in the MENA region is valued at around USD$260 billion.

This massive credit gap is driving a critical need for alternative finance solutions to fuel growth in this critically underserved sector of the economy.

Peer to peer finance

The Peer-to-Peer (P2P) finance model was first launched 10 years ago through companies like Zopa, Prosper and Lending Club in the UK and US. With the explosive rise of these companies and rapid development of the model in more advanced markets, peer to peer-to-peer finance has received increasingly greater traction in the media and with the public.

Peer-to-peer (P2P) finance is built on the ‘power of the crowd,’ on the principle of raising finance from a number of people who pool their resources together. Individual or small investors place relatively small investments in businesses, allowing them to gain higher returns and diversify holding. In exchange, SMEs get a lower cost and ready source of financing.

It is little surprise that businesses looking for lower cost finance and investors seeking higher and more reliable returns are embracing P2P finance. The central enabler of the model is its use of the internet to reach hundreds or even thousands of potential investors who can invest relatively small amounts of money to finance businesses in return for monthly interest instalments. The network effect and technology efficiencies of P2P platforms significantly reduce transaction costs versus bricks-and-mortar counterparts, enabling them to provide a source of finance for smaller businesses looking for small sums. On the Beehive platform, for example, the fact that individual investors can bid and compete to finance loan requests through an auction process means the SME will garner the lowest average rate. In the end, the allure of P2P Finance is its speed and its ability to cut
costs for borrowers, while promising higher returns for investors.

The evolving P2P finance landscape

P2P finance has grown exponentially since the advent of the industry; there are a wide number of peer-to-peer finance providers, also known as ‘marketplace lenders’, offering a variety of services targeted at small businesses and individuals across the globe.

P2P finance continues on a steep growth trajectory; finance originating from the industry reached $US 12 billion in the US alone last year. The most recent estimates project a 40 per cent year-on-year growth for the relatively young industry over the coming decade. Forecasts for the global P2P industry vary widely, from accounting firm PwC’s estimate of US$ 150 billion by 2025, to Morgan Stanley’s estimate of between US$ 150 billion and US$ 490 billion by 2020, to venture capitalist Charles Moldow’s more buoyant prediction of US$ 1 trillion over the same period. But even the lower end of the estimate range represents a compound rate of nearly 40 per cent annually over the next decade, signifying an undeniably noteworthy  upward trend.

P2P finance companies originated around US$ 9 billion of loans globally last year, and are expected to finance up to US$ 1 trillion within a next decade.

Why is P2P finance a viable solution for SMEs?

P2P finance is highly attractive for businesses looking for lower cost finance than they can secure through a bank, as well as for investors who want higher-than-market, steady returns.

Additional factors adding to the model’s appeal include the ability to make a financing request quickly, plus its ease-of-use and transparency, especially when compared to traditional sources of finance. This approach, supported by a robust risk assessment model, means businesses end up getting faster access to lower-cost, debt-based finance and investors get better returns on their money while diversifying their risk. Furthermore, most P2P platforms do not charge SMEs a penalty for early repayments.

The financial route a business opts for can provide a considerable competitive edge in terms of ability to make progress and to take a company to the next level. Access to affordable funding can make the difference between expansion and bankruptcy for a business, particularly in its first few years. A large portion of SME failures, across sectors, arise from the inability to access the finance they need at reasonable terms.

The UAE with its significant funding gaps is a ripe environment for Peer-to-Peer (P2P) finance to emerge as a viable alternative. The model has rapidly gained popularity due to the attractive cost, accessibility and flexibility it offers. Borrowing from tried and tested concepts in crowdfunding, P2P finance is a simple, novel way of raising money using the internet’s network-effect to get a large number of people contributing a small amount of money individually.

Accessing P2P finance in the UAE

In November 2014, Beehive was launched as the first peer-to-peer financing platform in the UAE, authorised and licenced by the DMCC, with a vision to transform the local SME finance market and increase the options that SMEs have to obtain finance. With an operational structure modelled on global best practice and robust investor protections in place, Beehive’s focus is to serve established credit-worthy SMEs looking to finance working capital for expansion and growth.

Through the use of innovative technology, Beehive set out to create a marketplace that directly connects established businesses with smart investors so that SMEs get faster access to lower cost finance and investors get better returns. Businesses seeking investment starting from AED 100,000 gain access to individual investors who bid to provide the financing, choosing how much they will finance and at which rate. The SMEs receive funding typically in 14 days, and investors receive monthly repayments at target rates of between 8 per cent and 20 per cent.

Building a comprehensive finance strategy

While P2P finance has its fair share of benefits, the reality is that using a combination of various techniques will yield the best results and give you a comprehensive advantage. So, don’t be afraid to complement P2P finance with more traditional sources of finance. The key to success lies in the prudent implementation of a strategy that best suits the unique needs of  your business.

About the author

Craig Moore

As Founder and CEO, Craig is responsible for overseeing the overall strategic direction and managing the day-to-day operations of Beehive.
Before founding Beehive, Craig was a Founder & COO of Butterfly Software, a data analytics and migration software company acquired by IBM in September 2012. Prior to Butterfly his experience includes various sales, consulting and finance roles at numerous multinational companies such as Dell, EMC, Hitachi and HSBC with an emphasis on 
shaping effective go to market and 
value propositions

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