Say you are running a small business that is expanding. You need money quickly, so what do you do?

You could borrow from a bank. But finishing the paperwork to prove your credit rating could take months.

Now there is a second option that is faster: You could borrow money from a P2Pportal.

P2P, which stands for peer-to peer, is a hot new lending phenomenon which matches investors with small businesses that need funds.

By cutting out banks, companies can access capital quickly and investors can potentially get good returns on their money at attractive interest rates.

It is a win-win situation. Borrowers can get cash as quickly as within three days, while lenders are looking at interest rates ranging from 9 to 24 per cent.

WHO : Aloysius Cheong, 38, managing director of Olive Green, a company that creates eco-friendly packaging LOAN AMOUNT : $110,000 PAID OVER : Three months INTEREST RATE : 17.9 per cent

WHO: Mr Ian Gan, 34, managing director of tuition agency SmathsConsulting LOAN AMOUNT: $100,000 PAID OVER: 12 months INTEREST RATE: 9.9 per cent

In Singapore, there are at least five P2P crowdlending sites launched within the past year.

Last year, three of them – Moolah- Sense, Capital Match and Funding Societies – raised more than $10 million for small and medium sized enterprises (SMEs). Other home-grown P2P crowdlending sites include FundedHere and New Union.The sites get a cut from either the lenders or the borrowers.

Olive Green, a company which creates eco-friendly packaging, is a P2P success story.

In September, the seven-year-old firm needed $110,000 to expand one of its product lines.

But instead of going the traditional route of taking a bank loan, its managing director, Mr Aloysius Cheong, 38, turned to Moolah- Sense.

The site took only three days to vet the company financials for risk of default, approve his application and send out information about the campaign to its more than 2,500 registered investors.

Sometimes, SMEs require short term loans for small amounts such as $50,000, but are unable to get the money from banks because they have a very short credit history or the loan is too small for the banks to service. MR PAWELKUZNICKI, 29, director of P2Pplatform Capital Match, on P2Pcrowdlending platforms not competing directly with banks

The campaign went live on Sept 9 and investors could choose to loan as little as $1,000 each. Within 12 days, the loan request was fully funded.

Mr Cheong paid the amount back – plus 17.9 per cent in interest – to his 33 investors over three months.

He says: “Even though I was charged a slightly higher interest rate than what the banks were offering, it still made sense to use a P2P site because it works faster and I was more likely to get the loan processed.”

Happy with the success of his first loan, he put in a request for a second loan of a similar amount last month.

By then, investors knew of his company and reputation for timely payments. The second campaign was snapped up by 39 investors in just two hours and 20 minutes.

ARE BANKS YESTERDAY’S NEWS?

Though the P2P movement kicked into high gear only in the last five years, it started in 2005, pioneered by British lending platform Zopa.

The movement gained strength after the 2009 global financial crisis, when banks started tightening criteria for loans,making the application process long, cumbersome and usually unsuccessful, especially for SMEs.

In contrast, applying for a loan on a P2P website can be more efficient, even though sites have strict criteria for applicants to reduce the risk of defaults.

Since all documents regarding contracts and financials are processed online, the approval time for a successful loan can be as short as three days.

Loans are very quickly listed on the online portals and companies can also opt to post videos introducing their team or business to boost their profile.

Once a campaign goes live, investors compete to fund the loan if they find the terms of the loan agreeable. And once funded, companies receive the money between one and three days.

But despite the streamlined processes of P2P crowdlending and its growing popularity, experts say it is not competing directly with banks.

Mr Pawel Kuznicki, 29, director of P2P platform Capital Match, says: “It’s more accurate to say that crowdlending is leveraging on technology to service smaller clients which banks may not be able to.

Sometimes, SMEs require shortterm loans for small amounts such as $50,000, but are unable to get the money from banks because they have a very short credit history or the loan is too small for the banks to service.”

For Ms Diana Salem, 27, who runs fashion and cosmetics e-commerce business nine00.com, the experience of taking a six-month loan from Capital Match taught her a lot about the loan-application process.

“The guidance I got from my account manager throughout the process was invaluable, especially as a start-up looking for alternative options,” she says.

Others say P2P has found a sweet spot between donation-based crowdfunding sites, such as Kickstarter, and banks.

Mr Lawrence Yong, chief executive of MoolahSense, says: “Sites such as ours allow businesses to tap the social aspect of collaborative finance – which means SMEs can include videos about their business as part of their campaign as well as participate in our networking sessions to meet potential investors face-to- face.”

The result? Besides getting the capital they need, businesses also get a publicity boost, expand their network and create future customers out of current investors.

This was the experience of tuition agency Smaths Consulting, which took a $100,000 loan in November2014 on MoolahSense.

The loan was paid over 12 months and its investors received 9.9 per cent in interest.

Smaths managing director Ian Gan, 34, says: “I used the money to expand the business and create an app for our students, but also saw an added public relations benefit.”

He added that because he used a P2P platform, many of his investors ended up either sending their children to his tuition agency for classes or recommending his business to other people.

WHO INVESTS IN P2P?

All the portals that The Sunday Times spoke to say that a majority of their active investors are relatively young, ranging in age from the late 20s to early 40s.

Some of these investors say they got into the lending game to support home-grown businesses. They also spread their risks by spreading their investments beyondP2P platforms.

Master’s student Lionel Foo, 26, says: “Millennials like me are less loyal to specific banks for investments so we’re more likely to try out things such as P2P lending, so we can support local SMEs.”

And even though he has yet to make a loan on a P2P portal, he says he is looking forward to doing so, especially because he can invest as little as $1,000 a campaign.

Another investor who believes in supporting local is commodities trader Gareth Evans, 33, who is an active investor on Funding Societies. He has “a few tens of thousands” of dollars invested across 25 Singapore companies in diverse sectors such as manufacturing services, educational services and food supply.

He receives 11 to 16 per cent in interest before Funding Societies’ fees.

But ultimately, high interest rates from short-term loans are still the best incentive.

A 33-year-old MoolahSense investor, who wants to be known as Mr Wang, has invested $25,000 in seven companies since June last year.

He now enjoys an average of 17 per cent returns on his money.

The financial professional says: “Because the loans are only for a maximum of 12 months, my money is not locked away for long.

“Plus, the P2P site does all the extensive due diligence on the SMEs, including offering credit ratings from Credit Bureau Singapore, so it’s easy for me to decide where to reinvest my money without any hassle.”

GREY AREAS

But despite the glowing customer reviews, the P2P lending industry is not without risks.

SMEs inherently have a much higher risk of going bust or having insufficient cash flow to repay loans.

And because P2P platforms only match borrowers with lenders, they are not responsible for defaults on payments.

Mr Christopher Quek, director at start-up incubator Angels Gate Advisory, says that despite P2P platforms’ best efforts, “the risks are still very high as lenders are investing in companies that have limited assets. The platform is also not responsible for any losses or lack of repayment of the loan”.

When queried about this, all the portals say they caution investors about the risks on their sites and recommend investing only as much as you are willing to lose.

MoolahSense and Capital Match have each encountered a case of a business defaulting on payments. Both platforms are mediating between the companies and their investors.

Currently, the P2P landscape is not covered by specific guidelines from the Monetary Authority of Singapore.

But according to the regulatory body,there are certain guidelines under the Securities and Futures Act thatmayapply to crowdlending platforms here – though it seems the P2P portals are interpreting them in varied ways.

For example, MoolahSense approves only campaigns that are asking for at least $100,000 and for a maximum of 12 months. This is to avoid having SMEs provide a prospectus to investors – based on an exclusion under Section 239 of the Act.

Capital Match offers loans that are less than $100,000, but does not offer details about the campaign to more than 50 investors – yet another exclusion under Section 272B of the Act.

In the meantime, the monetary authority is working on more specific guidelines for the sector. It issued a public consultation paper on the matter in February last year.

A spokesman for the Monetary Authority of Singapore says that proposed guidelines will “strike a balance between facilitating investments in start-ups and SMEs and ensuring that there are sufficient safeguards for investors”.

In the interim, P2P portals are doing their part by collaborating with the authority to ensure investors are protected as best as possible.

Funding Societies, for example, uses a third-party trustee agency registered with the Monetary Authority of Singapore – Orangefield Trust – to hold and transfer all crowdlending money so that there can be no money laundering or fraud.

FundedHere is applying for a Capital Markets Services licence, which allows it to raise money on behalf of companies. Although the firm was founded in December 2014, it will officially start operations only after it gets the licence.

Its chief executive Michael Tee says the company is on track to be the first portal to offer accredited investors both loan and equity crowdfunding options (where investors can invest towards a stake in the company) by the first half of this year.

These developments will offer more choices to investors who are always looking for better ways to park their money.

Retiree Anthony Wong, 52, who is an active investor looking to invest on a P2P portal, says: “As long as you diversify your investments, you should be okay.

“So far, the probability of defaults has been quite low and it’s only when you accept higher risk that you may get higher returns.”