More small businesses look for alternative financing

Small businesses tend to look to banks for financing, but Funding Societies Malaysia chief executive officer Wong Kah Meng talking to Starbiz notes an increasing demand among SMEs for alternative financing such as peer-to-peer (P2P) lending.

In recent months, the P2P platform has disbursed some RM10mil to RM12mil a month compared to about RM1mil monthly a year ago.

“In Malaysia, we have disbursed more than RM70mil to-date (since we launched here in February 2017). Our target for this year was RM50mil but we’ve already hit that target. For now, we are still growing month on month,” says Wong.

The platform is expecting strong growth over the next few years as awareness on P2P improves.

Funding Societies is one of the six P2P financing operators registered under the Securities Commission Malaysia.

To help fill the financing gap for the SME market, Funding Societies focuses on providing businesses with short-term financing.

“So we are not competing with banks. We had to see how we can position ourselves and support SMEs, and along the way, figure out (the different products) we can offer like invoice financing.

“Banks are still very much into long-term financing, at least three years, and also big ticket financing, at least RM500,000 or RM1mil. So that leaves a big segment out, (those that want) less than RM500,000 or less than 12 months financing. That’s where banks find it a non-profitable segment. So they are credit-worthy but not necessarily bankable,” says Wong.

P2P platforms enable small businesses to crowdsource funds with less documentation than what is required by a bank. It could also be a quicker way of obtaining funds.

Wong notes that bills hosted on Funding Societies for below RM500,000 are typically taken up within minutes. This allows it to disburse the funds to companies within days.

A Johor-based furniture maker, which couldn’t secure loans with the banks, turned to the P2P platform following advice from their accountant. Since November last year, the manufacturer has raised nine rounds of financing through Funding Societies totaling over RM1mil.

“Funding Societies are faster in terms of approval and disbursement of funds. Banks have a lot of procedures and takes months. Funding Societies can do it within a few days,” says its managing director.

The company, which mainly exports its products to the US, makes an average profit of about RM1.5mil on the back of revenue of RM20mil to RM30mil.

“With the US-China trade war now, a lot of business opportunities are coming to Malaysia. But if we want to take up this opportunity, we need funds to get materials and grow,” he adds.

The 42-year-old managing director, who is running a family-owned furniture manufacturing outfit, says convincing its executives to go with alternative financing wasn’t a challenge. They were more concerned about whether the profits generated through the funds raise would be worthwhile. And when the numbers added up, it was an easy decision to make.

While SMEs seem more open to try other sources of funding, Wong says the challenge for P2P players is to be at the “top of their minds when they need you”.

There is still a lot of awareness needed to educate the market, adds Wong.

Funding Societies is hoping to expand its presence outside the Klang Valley next year.

“We are trying to work with our partners, like accounting firms and banks, to reach out to SMEs not just in the Klang Valley, but also outside of the Klang Valley. We are leveraging on their network because they would know better when their customers will need financing.

“Those are some of the channels that we are using to expand. It’s really about how to be there when the SMEs need us,” he says.

Currently, some 70% of Funding Societies’ customers come from the central region.

Wong says his team communicates closely with their customers to identify their financing needs in order to offer them a solution that is catered to their capability.

“Banks have standardised solutions. They give you a loan for a certain amount and for a fixed term. We are more flexible in terms of structuring the financing itself.

“If the purpose of the funds is for short-term trade financing, just to buy and sell, for example, then we will tailor the payment terms for them, whether they make full repayment or equal instalments every month. And we make it known upfront to the investors what the payment structure is like,” he says.

Approval rate for SMEs looking to raise funds on the platform is 70%.

“There are certain criteria we look at, such as the character of the applicant. We try to visit their premises, understand their business models, get to know who their suppliers are and how long have they been around. So the first step is really to understand the SME. The other is historical track record,” he says.

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