P2P ASSET BASED FINANCING: A TOOL FOR RECOVERY DURING COVID-19.
Updated: Sep 1, 2021
It has been over a year and a half since the world has been “plagued’ by the COVID-19 pandemic. While causing existing financial arrangements to be affected, this public health crisis has shined an unlikely spotlight on asset-based financing, according to Mitsubishi UFJ Financial Group (MUFG). Another byproduct of the pandemic is the recent boom in fintech, one area which has similarly caught traction is peer-to-peer (P2P) financing.
This article explores how merging P2P financing with an asset-based strategy can potentially benefit borrowers and investors during this trying period.
P2P asset-based financing (P2P ABF) is financing that is secured and closely tied to a tangible asset such as property, machinery, or other forms of collateral conducted online by matching investors and borrowers without financial institutions as intermediaries.
The impact of the pandemic on many businesses has seen revenues fall, cash and profits eroded. Albeit such grim realities, traditional financial institutions have responded by tightening their belts and limiting funding. As a business riding the wave of uncertainty, access to funds to ensure continuity is and will continue to be a primary concern. With access to funding through traditional routes becoming seemingly more difficult, P2P asset-based financing is primed to support businesses.
Easier application compared to traditional banks - A unique characteristic of P2P ABF is the focus on the value of the businesses’ assets as opposed to their balance sheet, making it a useful option especially for businesses with valuable assets or businesses with lower credit scores. Moreover, certain assets such as property have the capability of maintaining their value as collateral, even if the business faces challenges such as cash flow/low earnings during the financing period.
Lower interest rates for businesses - Borrowers can access loans with interest rates lower than from traditional lenders like banks. As investors directly provide financing to borrowers through the P2P platform, there aren't the usual overheads associated with most financial service providers. This allows both parties to benefit from more favourable rates.
A silver lining to this pandemic within the investment sphere is the increase in people getting into the stock market and starting their investment journey. Countries such as Singapore have seen a rise in trading and investing as new investors seek “to take advantage of a market correction”. In Malaysia, fintech was an area that showed exponential growth during COVID-19. From an investing standpoint, the merging of the P2P financing model and asset-based strategy brings great benefits and security to investors.
Better interest rates and returns - An attractive rate of return is one of the primary benefits that draws investors, as the platform can give significantly higher returns compared to conventional savings accounts. This also allows investors to combat inflation and low-interest rate environments.
Better security for investors – While all forms of investment comes with a unique set of risks, the aspect of pledging assets provides an added layer of security that protects the interests of investors. This is because the collateral provided by the business prior to obtaining financing can be used to offset any losses to investors should the business be unable to repay the loan. This additional aspect of security lends strength to the conventional P2P platform, which came under scrutiny in 2020 due to Chinese investors suffering losses under a highly unregulated market.
While nobody knows for certain how long the pandemic will continue or what the post-pandemic landscape looks as businesses recover, many may face a sudden spike in activity due to pent-up demand. Access to funding that is flexible and allows them to scale quickly will be paramount, especially since cash flow lending will require sound earning performance.
The P2P ABF model offered by Capsphere has the potential to unlock financing opportunities for businesses with substantial assets. Coupled with a pool of institutional and individual investors, Capsphere will be able to bridge the gap between borrowers and investors using its online platform.