4 Questions to Ask a P2P Lender Before Taking a Business Loan

Cash flow; the common headache for every small business owner (SMEs). For any business to prosper, proper cash management plays the defining role – whether the business does succeed or not. In general, industries that trade with clients on credit terms will face cash flow issues. With payment terms ranging from 30, 90 to even 180 days, it’s a rollercoaster ride for these SME owners. Their cash is tied up in invoices and they might not have enough funds to canvass for new projects or orders which they can only do so after receiving payments. 

Dipping into emergency funds is not an option. This sum of money or also known as the ‘safety net’ is meant for unexpected expenses. Similar to a personal savings account, they provide refuge for rainy days and a cushion during dire circumstances. 

Enter P2P lending platforms for SMEs. Bringing their own set of unique characteristics into the loan market, these platforms specialise in zero collateral, short term financing. Its pay-as-you-use model attracts small businesses, as the flexibility allows them to take up whenever needed without having to commit to long-term contracts. Qualified SME owners can expect to receive their approval and funds within 48 hours. These loans are funded by investors on the platform, giving SMEs an alternative cash flow lifeline for their businesses on top of traditional financiers. 

P2P platforms like Validus in Singapore operate in a credible, well-regulated jurisdiction, such as the Monetary Authority of Singapore (MAS). They go the extra mile for security, such as keeping funds in an escrow account, managed by a MAS-regulated third party. These are some examples of assurances that the public can take comfort whether they are looking for a small business loan or investment opportunities. 

As the first fintech to be approved as a Participating Financial Institution (PFI) under Enterprise Singapore’s Enterprise Financing Scheme, Validus will provide working capital solutions to SMEs. The government-assisted financing and risk-sharing schemes are part of the Singapore government’s initiatives to help support the needs of local businesses especially during the pandemic. These schemes offer up to 90% risk sharing when financing is given to SMEs by the participating financial institutions (Validus included now). The move reaffirms Validus’ mission to address the SME financing gap and its mission to double down on our efforts to impact and empower SME growth. 

With a number of similar platforms in the market, SMEs have options to choose which would best work for them. We narrow down the 4 questions to ask a P2P Lender before taking a business loan:

1-What are your business financing options?

In some cases like purchasing initial resources or renting an office space over the long term, a typical bank loan still applies. 

P2P platforms offer short-to-medium term financing and are typically suited for covering production or operational costs. Various business financing options include invoice financing, purchase order financing to working capital and more. 

2-How much can I loan?

Application is hassle free with minimal documentation and SME owners are able to tap into unsecured financing of up to $500,000 at personalised and affordable rates and at any point of time their business would require. 

Note that the final amount is subjected to assessment against each P2P platform’s lending criteria, standard disclaimers and terms and conditions. 

3-What is your cost of financing? E.g. fees, interest rates

Fee structures vary from each platform, hence, the onus is on the borrower to understand the costs of financing prior to taking up a loan. In particular, be wary of sites that charge unusually low interest rates. Some P2P lenders use this method to entice borrowers, but make up with steep administrative fees. 

Other hidden costs like excessive late charges, “refinancing” payments to roll over a debt, and add on “credit check” fees for reviewing creditworthiness are usually unnecessary. SMEs need to know how and when late fees are charged. Some P2P lenders implement a single fixed amount, while others charge based on the loan size. 

A P2P platform might impose an interest rate hike if the full loan amount is not repaid within a certain time period. There are some lenders who would also impose charges for early redemption of a loan, either as a flat fee, or as a percentage of the loan quantum. 

4-What is your repayment schedule like?

Platforms like Validus offer the following repayment schedule: 

Invoice FinancingPrincipal + Interest in a bullet repayment at the end of 30, 60 or 90 days – depending on the facility tenure
Purchase Order (PO) FinancingPrincipal + Interest in a bullet repayment at the end of 30, 60 or 90 days – depending on the facility tenure
Working Capital FinancingRepayment period is principal + interest every month for 6, 9 or 12 months

Note that not all P2P platforms operate the same repayment schedule, SME owners must exercise due diligence on their part. 

Is a business loan considered a Bad Debt? 

When capitalised fully, a smart business loan is not a Bad Debt, rather, an investment for your business. Think business growth, expansion and the opportunity costs. The key is planning ahead with a business forecast plan on hand to maximise its benefits. 

It takes money to make money; there is absolutely nothing to fear or be ashamed of. 

In the past, SME owners have long struggled with obtaining financing for their business. The lengthy application and approval process makes it difficult. With P2P lending for small businesses, SMEs have another viable, trustworthy ready line of credit to grow their business. 

Today’s competitive landscape meant the ability to seize opportunities and pivot – some of the crucial traits necessary for a successful business. For the business to prosper, strategising carefully the next move by taking calculated risks could very well work in favour, giving its much needed added boost.