SME funding gap: P2P lending to the rescue

May 14, 2015

Obtaining finance for a small business is no laughing matter. The International Finance Corporation (IFC) estimates that the current SME funding gap in global emerging markets today is more than USD 2 trillion (approximately USD 260 billion in MENA). Bridging this considerable imbalance is driving alternative finance solutions, one of which is crowdfunding.

The most common form of crowdfunding is equity based, where people sell off stakes in their business for money. The risk is shared, but so is the reward. It’s a great way of doing things, but is skewed towards start-ups willing to sell off slivers of a future empire, for cash in the here and now.

But what if you’re a reasonably established small business that wants funding, but doesn’t want to sell equity? That’s where Beehive comes in. A wonder of the online economy and drawing success from its ability to generate scale by connecting thousands or millions, Beehive has introduced peer-to-peer (P2P) financing to the region. Simply put, P2P financing uses the Internet as a platform to reach hundreds or even thousands of potential investors and borrowers. It’s people lending to people, on a vastly bigger scale.

The main point of departure here is that unlike conventional crowdfunding, Beehive’s investors are actually giving out loans. They’re not buying into a company at all. INVESTING IN DEBT But why would anyone choose to invest in debt rather than equity? Mohamed Nour, marketing manager for Beehive, has a ready answer. “Debt-based finance solutions work best for established, credit-worthy businesses that are in need of additional working or growth capital. Debt-based P2P offers investors high returns coupled with monthly repayment schedules.”

But why would companies consider P2P finance? Why not just get a bank loan? The proof of the pudding is in the numbers. SMEs represent 90% of total businesses in the UAE and provide more than 86% of jobs in the private sector. Yet their access to lines of credit is sorely curtailed. “Banks generally reject between 50 and 70% of SME loan applications. SMEs only account for approximately 4% of bank lending in the UAE,” Noor explained. Another barrier to accessing institutional finance is that it takes the same paperwork and reams of filing to apply for AED 5 (USD 1.36) as it does for AED 5 million (USD 1.36 million). For small businesses, this is prohibitive – in terms of cost, overheads and resources.

The alternative then is approaching the public, cap in hand. Except that when it’s institutionalized, backed by technology and a robust vetting process, the outcome is mutually beneficial for lender and borrower. “P2P’s ability to match capital demand and supply in an unprecedented manner has led to the sector being referred to as ‘marketplace lending’,” Nour said. P2P finance isn’t a flash in the pan. Globally, the P2P financing industry crossed its 10th year of business in March 2015. By 2025, it will have delivered USD 1 trillion worth of financing, according to estimates.

DUE DILIGENCE

In the UAE, Beehive is starting smaller, but with a purpose. A total of 1,000 people have already signed on to become investors and more than 17 businesses have already been funded to the overall tune of AED 5 million (USD 1.36 million) since Beehive’s official launch in November 2014. When the numbers are crunched, the month-on-month growth in registrations comes to some 20%. Not bad for a startup at all.But there might just be a fly in the financial balm.

Regulators haven’t got around to drawing up frameworks for conventional crowdfunding, much less its newer P2P cousin. What makes investors confident their money might be coming back? Nour said Beehive plugs that gap by doing robust due diligence in its own right.

“Each business undergoes a rigorous risk assessment. This due diligence is undertaken by our experienced internal risk analysis team and further supported by robust third party on-site verification. Only businesses that pass our risk assessment are listed on the Beehive marketplace.”

A host of stringent procedures ensure investor money is kept from harm. All investor finds sit in segregated bank account in the UAE, operated by a third-party fund administrator. Even in the event of Beehive bombing, outstanding investments will be managed and ‘unwound to completion.’ It’s not for every business. But P2P finance has a huge role to play in the creative domain, with monetary contributions used to support independent films and music, in addition to efforts directed at protecting and archiving the region’s rich artistic and cultural heritage. Innovation, software development and even scientific research and community projects – there’s very little a mature P2P framework can’t tackle.

Beehive is already in discussions regarding regional and global expansion in 2015 and beyond. Craig Moore, founder and CEO of Beehive, believes P2P is here to stay. “By launching our P2P finance platform in the UAE, Beehive has broken ground in a key emerging market, a regional finance hub, and a growing focal point for global trade. We look forward to building on the exceptional response we’ve received to achieve more widespread awareness of what we have to offer to small businesses, investors and the overall economy.”

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