A New Paradigm For SME Banking
Traditional banks can work with peer-to-peer lenders to broaden financing options for local SMEs.
Author: Joyce Tee, Managing Director and Regional Head, DBS SME Banking.
Innovative start-ups are disrupting a range of industries with new business models, and threatening to unseat the dominant players in the process. The most striking examples have been in the transportation and hospitality sectors. Uber and Grab have in a few short years become a serious threat to traditional taxi companies, while Airbnb has taken away market share from hotels all over the world.
The financial sector, too, has seen new entrants with potentially disruptive business models. In Singapore, so called peer-to-peer (p2p) lending platforms have emerged in recent years. p2p lending, also known as crowd funding, is an alternative channel of financing for newer and smaller businesses without established financial records that may have problems obtaining traditional bank credit. It is also a useful alternative for SMEs who already have a bank loan but are looking for other sources of financing.
At DBS, we do not view p2p players as a threat to our business, but rather complementary to the services that we provide for SMEs. Indeed, DBS recently signed a deal with Funding Societies and Moolahsense to widen the financing channels available to local companies.
Under the tie-up, DBS will refer SMEs to the two p2p platforms that we are unable to lend to. On their part, the p2p lenders will refer borrowers who have completed two successful rounds of fund raising to DBS for larger commercial loans and other financial solutions such as cash management.
This partnership is a good example of how traditional and alternative finance providers can work together to support the funding needs of small businesses.
One such initiative is SPRING Singapore’s Micro Loan Programme (MLP) that allows local businesses to borrow up to S$100,000 with a repayment term of up to 4 years, and competitive interest rates of between 7% p.a. and 9% p.a. Smaller firms can also benefit from the SME Working Capital Loan Scheme that was unveiled at Budget 2016. This initiative allows for loans of up to S$300,000.
The emergence of crowdfunding has expanded the range of financing options available to SMEs, and that is a good thing. p2p borrowers can now be funded at an earlier stage of their development before moving on to a banking relationship necessary for further growth.
Once that relationship is forged, SMEs can take advantage of the trust and expertise that banks are well known for. Among other services, bankers can help their SME customers with optimising their cash flow, managing financial risks and internationalising their business. Banks can also offer SMEs regional connections to enable smooth cash management for their cross-border transactions.
Significantly, a bank’s backing improves the credit worthiness of a company, making it easier for it to obtain more loans in the future
For young SMEs, going the route of P2P lending platforms to get loans would be a real alternative. But once they have hit a certain level of growth, it would be necessary to count on banks to take the company to the next stage of maturity.
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