Alternative financiers are often regarded as the more appropriate solution for SME’s seeking corporate funding needs than banks in this increasing deleveraged and regulated financial economy. While lacking in scale and infrastructure as compared to global banks, they pride themselves as being imaginative in terms of the security packages and flexible in terms of the solutions they can provide. We sat down with Roger Crook, CEO at Capital Springboard to get his thoughts and perspectives in this growing trend that is alternative financing in Asia.
Q: Hello Roger, thank you meeting up with us!
Roger: My pleasure. Happy to be part of the Financial Inclusion Summit Asia 2017
Q: How does the use of alternative finance fill gaps in SME credit history?
Roger: Alternative finance is a disruptive method of financing which allows SMEs to borrow from ‘peers’ rather than the bank. These ‘peers’, which are peer-to-peer online platforms are able to provide capital to SMEs, at a time when they don’t qualify for a bank loan.
There are various reasons why these SMEs are unable to obtain finance from the banks – such as being less than three years in operation, having lesser than S$30M in turnover, and so on. There have been growing number of SMEs falling into a category which we call the un-banked and underserved sector. Despite being in need for trade financing which supports growth and sustenance; they are unable to obtain it from regular banks.
Insufficient working capital for SMEs not only hampers their growth, but also has a direct impact on their receivables and business operations. And if this were to prolong, there is very little option left but to wind down the business due to the costs of doing business.
Alternative finance serves such SMEs trapped in the underserved segment of the market, by matching their outstanding invoices with investor funds. This way SMEs benefit as they get access to short term financing, and investors on the other hand are able to make up to 20% worth of returns by investing in such invoices.
It’s a clear win-win.
The beauty about fintech here, is that it makes it accessible, convenient, and transparent for both parties to transact. Capital Springboard functions as an online marketplace for such SMEs and a wide class of investors (accredited, institutional, IFAs, and HNWIs); facilitating the financing of invoices for substantially high returns, let’s say up to 20%, or sometimes even more.
Q: What are the use regulatory implications of alternative finance?
Roger: The Monetary Authority of Singapore (MAS) has shown great support and encouragement for the local fintech sector. The 2016 inaugural fintech festival was a colourful one, well-attended and definitely a step in the right direction for further progress of Singapore’s fintech scene, which is booming at the moment. It will be interesting to see if MAS introduces further incentives in 2017 for local fintechs.
Q: Has fintech disrupted the small-to-medium enterprise market, or just brought it back to where it should be?
Roger: The disruption created by the marriage of finance and technology has helped SMEs in many areas. Peer-to-peer platforms for instance enable companies to raise funds for a variety of entrepreneurial purposes. The disruption allows platforms like ours, to directly reach out to SMEs and cater to their needs, bypassing traditional lenders, like banks. Platforms are generally faster, more efficient and more cost effective than traditional banks for SME’s to get funding. And it works vice-versa, where SMEs can address their immediate need for financing without having to face rejection from banks. And in fact, it’s from this point on – that SMEs are in a position to grow the trade further.
So the disruptive forces in the market, in this case, has proven to be beneficial for smaller enterprises.
Q: What are some of the challenges for SME lending?
Roger: The challenges involved when lending to SME’s is the risk factor; and we are able to effectively overcome such challenges.
To maintain the quality of investments on Capital Springboard we minimize investment risks using technology and stringent checks. To put it very simply – an investor’s risk is dispersed or spread across various invoices, with the help of algorithmic decision making process. This fractionalizes the invoices and leads to proportional investments made across multiple invoices and SME’s.
On the physical front we do a lot of credit checks on the SME companies and on the debtors of the invoice. We grade each invoice, each SME company and debtors, based on their credit-worthiness including whether we’ve got a personal guarantee from the owner of the business and whether we’ve got a nominated bank account so that the debtors pay directly into the bank account. Our in-house trade experts’ use a number of factors to determine the risk grade of each invoice, using a combination of market knowledge, business history and specialist advice. Our experts then grade each invoice from A+ to F, to give investors a very clear picture of potential risk/return. The investor can also choose to take manual control of the investment; in the sense, they can manually decide on the degree of risk they are willing to take. The returns are good, the default rates are low, and that’s one of our strategies as a company.
Q: How will the rise of alternative financing affect the way banks lend?
Roger: I think alternative finance is a fast developing big investment opportunity. In the near future I see invoice financing becoming an even more important aspect of the market in Southeast Asia and especially in Singapore. An increasing number of smaller enterprises and startups are falling into the un-bankable and underserved pit hole, which hamper their growth and sustenance. These firms are being faced with higher costs of doing business and have limited avenues for obtaining funds. Investors who make greater returns from alternative financing platforms as compared to traditional investment portfolios, have significantly grown in number; and are progressively increasing their invested amounts. We have witnessed this with Capital Springboard, aside from accredited and institutional investors, we see a steady rise in the number of family offices, independent financial advisors, and HNWIs.
Naturally, as the peer-to-peer industry has become more attractive and serves a larger segment of the market; larger financial institutions, like banks, will have to integrate such disruptive forces into their business models. It may not directly change their lending methods per say, but there will be newer funding options which will be gradually introduced. Locally, banks are closely studying the peer-to-peer models, and some are even partnering with such fintech firms, to further enhance bank’s financing options.
Catch Roger and other alternative finance experts onstage at the 2017 Financial Inclusion Summit, 18th to 19th April 2017 in Singapore at the Suntec City Convention Centre. To find out more about the very latest in microinsurance and other financial inclusion led initiates in Asia, CLICK HERE to find out more.