Access to formal and affordable channels of credit has always been a problem for small and medium enterprises (SMEs). It remains one of the most painful points among SMEs in major countries, including India and the US.
Despite their significant contribution to the GDP, they are often declined formal credit to keep their operations going. SMEs find it difficult to:
- get access to sources of finance
- expand their operations
- generate working capital
Unsurprisingly, these SMEs are witnessing a huge capital shortage. According to a report published by International Finance Corporation (IFC), sited by World Bank – an estimated 65 million SMEs in developing countries have an unmet financing need of $5.2 trillion every year. The figures are quite similar when it comes to Europe, East and Central Asia. The financing gap is even bigger when micro and informal enterprises are taken into consideration.
The advent of peer to peer lending
The rapid evolution of technology in the finance sector has altered the way businesses access to loans/finance. It paved the way to alternative financing, bringing the rise in peer-to-peer lending space. Although the concept of peer to peer lending was originated back in 2005 with Zopa in the UK, it has grown at an astonishing pace globally.
Peer to peer lending promises substantial benefits to modern SMEs.
Unlike traditional banking, getting a loan from p2p platforms is often affordable for people and small businesses. How? It removes the need of banks as intermediaries that reduce the cost of obtaining loans. Moreover, many platforms offer lower interest rates as compared to banks with added flexibility and quick operations.
Easy online processes
Most peer to peer platforms operate online that offers borrowers the flexibility of obtaining credit without needing to visit any physical branch. As SMEs today are well versed of technology and online operations, it comes as an added benefit to them.
Platforms that offer peer to peer lending are generally free from government intervention hence offer services without any futile rules and regulations. This is generally a problem faced by major SMEs as they lack the paperwork compared to big organizations and companies. Furthermore, the processes become smoother and quick for SMEs, leading to better credit accessibility.
Advanced credit evaluation
Probably the biggest advantage is the advanced credit check process that enables credit facilities to SMEs with no formal credit score or history. SMEs often fail to share relevant data to access their credit report. New and advanced credit scoring models save those SMEs who are new in the market or have been dealing in cash.
Bridging the gap
With peer to peer lending, barriers in the lending sector have been broken for SMEs with the availability and accessibility of financial data. SMEs have been able to obtain a loan at a lowered cost, with reduced processes and paperwork. It has significantly closed the gap between lenders and borrowers providing SMEs access to easy and quick credit facilities. They are now offered with better finance solutions bridging the gap they have been facing.