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Alternative Finance, Working Capital Solution for SMEs

Over the last few years, alternative finance providers in the Asia Pacific Region have exploded in numbers and garnered significant traction from stakeholders of the Financial Industry. This bodes well for the industry.  Alternative finance excels in improving efficiency and reducing costs, enhancing security and making obtaining working capital processes much simpler, all resulting in better customer experience. Hence, this is an excellent working capital solution for SMEs.

In traditional lending for example by Banks, the depositor is not directly connected to SMEs.  If and when the SME defaults, the depositor is not directly impacted. The intermediary that is the Bank takes the risk. For this disconnection and protection the bank charges at least 10 % points between a term deposit and a personal loan.

 

Alternative Finance, Working Capital Solution

In P2P marketplace, the investors directly provide working capital financing, which is an asset to SMEs working capital solution. There is no more an intermediary. Thus the platform can narrow the account receivable financing and SME rates and overall improve the working capital solution. However, when the SMEs defaults the investors bears the loss.

Almost all factoring providers are aware of the importance and need for sustainable business practice. They strictly check on SME’s credit worthiness like credit history, ability to pay and even at times requiring secured security.  This bodes well for the industry as the average defaults across P2P marketplace is low at less than 3%. In addition, alternative finance consistently endeavours to further mitigate risks of the Investor. This is done by spreading their funds across a range of SMEs.

Some people see all regulation as anaethema to free markets. In reality, most markets can’t function without some form of it.  As Nobel prize winner George Akerlof demonstrated in his analysis of the used car market – his famous work on the “market for lemons”.

If buyers can’t tell whether they are buying a good car or a lemon they will never pay what a good car is worth. Owners of good cars will not offer their cars for sale and eventually only lemons will be left. Markets with this unequal information problem are likely to collapse without minimum quality guarantees.

 

Thoughts on Regulatory

Some form of regulatory guidelines would be welcomed to ensure good practises and nurture the factoring industry to greater heights. There is a lack of data on alternative finance making it very difficult to make intelligent regulations.  There is not much up to date information on the alternate finance regards their size, scale and scope.  In this respect, the University of Sydney Business School has joined forces with the United Kingdom’s University of Cambridge and Tsinghua University in China, to conduct the first comprehensive survey of the rapidly expanding alternative finance sector in China and across the rest of the Asia-Pacific

The future is looking bright for alternative finance, as they are continuing to provide services that better meet customers working capital needs as the ideal working capital solution for SMEs.

 

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