As traditional financing tighten credit lines, P2P & ECF platforms are reaching out to more SMEs.

By Bernie Yeo

Since the first peer-to-peer (P2P) financing platform was launched in 2016, the industry has witnessed healthy growth under the watch of the Securities Commission Malaysia (SC). The Covid-19 pandemic has, suffice to say, thrown the industry off course. 

"The Covid-19 pandemic has negatively impacted businesses across most industries, especially businesses that operate predominantly offline or rely on physical touch," Funding Societies Malaysia co-founder and CEO Wong Kah Meng (pic) tells Smart Investor

In this case, P2P financing platforms play an important role in balancing the needs of both SMEs and investors, and this remains true especially during the current unprecedented economic situation.

On the outlook for the P2P financing sector, Wong foresees the sector will become more appealing to the investment community given the low interest rate environment, coupled with the volatile capital markets globally.

"Over the medium and longer term, we are hopeful the pandemic could even serve as a catalyst to spur the next wave of digitalisation of businesses across the economy as well as the emergence of new digital business models, which will benefit the P2P financing industry given its digital focus," he opines.

However, equity crowdfunding (ECF) platform Ata Plus co-founders Elain Lockman and Kyri Andreou say it would be naïve to assume it is business as usual for the economy.

"People’s behaviour, spending, and investment patterns have changed and the medium- and long-term impact on businesses have yet to be ascertained with any level of accuracy," they say.   

For players in the ECF and P2P financing space, they observe there has been a considerable increase in interest for raising funds by SMEs via these two methods. 

"The improved terms for the Malaysian Co-Investment Fund (MyCIF) introduced at the onset of the pandemic can then be said to have succeeded to an extent, though in the end it still requires the participation of the wider investor market," they explain.  

Challenges to meet loan obligations

As cashflow becomes tight and businesses see substantial declines in revenue during the coronavirus outbreak, it is inevitable many MSMEs find it a challenge to meet their loan obligations to P2P lenders.

"Throughout the MCO, Fundaztic has never stopped MSMEs from having a chance to apply for funding with us. From a credit standpoint, however, we did take a more prudent and careful approach to ensure that all approved applicants are viable and creditworthy businesses," explains Calvin Foo, acting CEO of Peoplender Sdn Bhd (which operates P2P platform Fundaztic).

Bearing in mind that most businesses were not able to operate during the MCO and CMCO period, Fundaztic has also taken a proactive approach to offer restructuring and rescheduling (R&R) to their issuers as a solution to get them through these tough times.

"This approach has eased our issuers’ financial burden over this short-term period and therefore, we are not seeing any huge spikes in our default rate," adds Foo (pic).

The situation, he continues, did improve mid-June onwards, and the number of notes and investments have started to gradually increase since then. This indicates a majority of businesses are starting to become operational once more.

"As more businesses are adapting to the ‘new normal’, I foresee the P2P financing sector will continue to grow and assist more MSMEs in the country. In fact, I believe there will be more opportunities for the sector as businesses are starting to shift their businesses online."

microLEAP founder and CEO Tunku Danny Nasaifuddin Mudzaffar concurs, adding that the ability to restructure their loans allow issuers to extend the tenor of their financing so that they can pay less than what they usually pay in a month.

"Doing so will also give P2P investors higher interest/profit at maturity. It’s a win-win situation for all parties rather than allowing the Investment Note to default."

On Funding Societies Malaysia’s part, Wong shares that with the slower economic activity during MCO, they anticipated deferment and restructuring requests from their SMEs. 

“Deferment and restructuring options can help SMEs alleviate their immediate repayment obligations of up to three months so that they were able to meet other financial commitments such as salary payments to their employees, thereby helping to save jobs. “In return, investors are able to earn additional interests during the deferment period as compensation,” Wong reveals.

Growth opportunities abound

Despite the predicament brought about by the pandemic, growth opportunities for the P2P industry are still available.

Wong says one of their active efforts during the MCO was identifying SMEs with growth opportunities, particularly those within the defensive and counter-cyclical industries. 

These industries include healthcare, e-commerce, wholesale and retail of perishable goods, FMCG (fast-moving consumer goods), telecommunications and utilities, and transportation and logistics, among others, which they believe will remain strong or thrive during the current macroeconomic situation.

"As traditional financing avenues are tightening up their credit lines, this gives the opportunity for digital financing platforms such as P2P financing to reach out to more unserved and underserved SMEs in Malaysia that would benefit from the additional financing assistance," he adds. 

After all, over 98% of businesses in the country are MSMEs and as the whole industry has only served over 2,200 MSMEs as of June 2020, P2P financing is barely scratching the surface of the funding gap. 

Mitigating risks for investors

The P2P financing industry is far from matured and although the Covid-19 pandemic may have slowed down the growth of the industry, this is believed to be just temporary. 

There will be many businesses still being underserved by financial institutions, and these are the target segments P2P financing platforms are working hard on closing the financing gap for. 

At the end of the day, says microLEAP’s Tunku Danny (pic), MSMEs still need financing and P2P investors still have funds to deploy. However, the question is this: how do P2P investors know that their investment comes with the least risks possible? 

"P2P investors need to look at which type of businesses will survive and which won’t. Businesses that have pivoted or have an online presence are doing well, while those that are only brick-and-mortar will find it hard to make money due to lower footfall.

"P2P financing operators, on the other hand, need to encourage diversification of investments on their platform while being more selective in terms of the issuers they host on their platforms."  

Interest in early technology investments

The pandemic, according to Ata Plus’s Lockman and Andreou, has clearly shown technology played a crucial role in keeping our society functional during periods of lockdown and quarantines.

"These technologies coupled with the application of 'new' business concepts and/or models may prove to have a long-lasting impact beyond this pandemic. In terms of how we do business, how we trade, how we work, how we produce goods, how we buy goods, how we learn, how we seek medical services and how we entertain ourselves. 

"Business concepts/models such as the sharing economy, co-creation, crowdsourcing, customer to customer (C2C), freemiums, gamification, Big Data, software as a service (SAAS), community driven, democratisation and Open Source are now more readily accepted and relevant than ever before. 

"It is not a surprise there is a renewed interest in technology investments due to the pandemic. Technology or tech-driven businesses that are agile, scalable and have high degree of automation or digitalisation capabilities with new business concepts/models will be the ones that will be on the watch list," they say.

As an ECF platform, Lockman and Andreou believe that Ata Plus, like other platforms, want to give investors access to new investment opportunities that would previously only have been available to angel investors, venture capitalists, or private equity firms.

"We are here to connect investors who have the funds and businesses that need growth capital. Through ECF, sophisticated and retail investors can now access these investment opportunities with a much lower investment entry point into these exciting businesses. In Malaysia, the smallest investment that has been accepted by an issuer was RM10.

"While this is a medium-longer term investment asset class with potential high returns, investors need to be aware of the risks and limits of their total crowdfunding investments. The investors may lose all their money and most start-ups will fail. The trick is to always diversify your investment and not to put all your eggs in one basket," they conclude.