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Why listed SMEs are turning to marketplace lending

The incipient days of marketplace lending in Singapore were associated with the smaller spectrum where businesses sought to borrow sums ranging from $50,000 to $200,000. It has since matured significantly and the regulation of this sector is resulting in an upswing of trust and adoption.

Smaller listed companies (“Listcos”) in the Singapore Stock Exchange are now warming up to marketplace lending. Here’s why:

  1. Expensive to finance working capital with equity Being a listed entity, Listcos have unlocked access to the public equity markets to raise capital. In the past, many Listcos have done so using new share placements or rights issue to raise additional funds for working capital. However, issuing equity to finance routine working capital is actually one of the most expensive forms of capital raising by a company. If you subscribe to Robert Merton’s (an American economist, Nobel laureate in Economics, and professor at the MIT Sloan School of Management) model of a firm’s equity as a call option on the firm’s value, issuing new equity means giving away unlimited upside on the firm’s future value. New share issuance may be more justified for more strategic uses such as acquisitions or growth plans that are more accretive. For routine working capital uses, debt financing would be the more appropriate instrument.

  2. Bank financing may be inadequate, onerous or not timely A reason why Listcos, like many others, turn to additional sources of financing is that they may be inadequately served by banks, or perhaps banks impose terms and conditions that are onerous or overly restrictive to their overall corporate financial strategy. These could come with outsized pledges or charges of collateral or imposition of other restrictive covenants that effectively reduce the financing options for the companies. Another reason could be the bank’s credit review takes too long time and the company may miss an opportunity to secure a profitable deal if they were to wait out for the decision. Even if companies encounter a higher cost of financing with non-banks, the opportunity cost of losing a profitable deal may be even higher if they do not capitalize on it quickly.

  3. Traditional debt capital markets not really workable While theoretically, one may say that Listcos can choose to issue bonds in the debt capital markets, in reality, such solutions are not readily accessible. Why? Because the traditional bond issuance process is both a timely and a costly affair. Bond issuance typically occurs in tens or hundreds of millions so that meaningful fees can be earned from the respective capital markets professionals (bankers, lawyers accountants). If companies are only looking for a short-term working capital of smaller quantums (i.e., few hundred thousands to five million), there are not enough fees to incentivise various professionals involved. Hence, there lacks an economic motive for professionals to work the deal. If capital markets professionals were to charge their same going rate, the cost of fundraising will far exceed the “small” amount raised.

  4. Diversifying funding sources with marketplace lending A sound corporate financial strategy will look to diversify its funding sources, so as to avoid being overly reliant on one source. This will help to build resilience in case one tap dries up, other taps continue to run. Hence diversifying their funding sources at marketplace lending is a sensible approach. Through marketplace lending platforms like MoolahSense, Listcos are able to reach an untapped segment of private investors who are looking to earn returns by investing in promising companies. The tech-enabled platforms reach a diverse investor community whilst providing both – investors and SMEs a transparent and a frictionless experience.

The key advantages of marketplace lending most importantly are:

  1. Minimum entry barriers for eligibility.

  2. Access to products such as unsecured Business Loans and Invoice Financing.

  3. Flexibility in raising funds ranging from S$ 100,000 to S$ 5 million.

  4. Faster funding compared to traditional sources. Epicentre – a listed company, raised S$ 1 million in less than 26 hours through its campaign on our platform. Following receipt full documentation, the processing took less than two weeks.

  5. Increase brand awareness by reaching a large pool of individuals.

  6. Cost effective when compared to new share issuance.

  7. Retain equity and enjoy profits without the fear of market risk effects.

As marketplace lending expands further, companies who raise funds through these channels stand to benefit significantly. Furthermore, those who make prompt repayments will not only build trust amongst retail investors bust also increase their chances of faster funding and reduced costs for future loans.