Crowdfunding: Protecting businesses and funders

The recent spate of negative corporate news in Singapore – bond defaults and manpower retrenchment – has led banks to become more cautious about lending. This could mean further tightening of the credit environment which is unfavourable for businesses, especially small and medium-sized enterprises (SMEs).

SMEs, who are sensitive to market movements and credit flows, may find themselves trapped in a few difficult situations. Some may be turned away by traditional financial and banking institutions, whilst others face higher loan rates, or are confined to tedious loan request processes.

As such, many have begun to seek alternative financing means, including crowdfunding platforms.

However, there are two major misunderstandings that we need to address.

1) Crowdfunding has less stringent regulations than traditional financiers
This is not true. In fact, businesses seeking funds through crowdfunding often undergo rigorous screening before they are showcased on the platform. For instance, we have developed a proprietary risk assessment model, fully automated and takes into account both quantitative financial information and qualitative behavioural data to assess the credit risk of a funding request. 

2) Crowdfunding platforms lack proper security measures, hence putting investors at risk
This concern is understandable. Even large companies perceived to be safe and doing well go bust from time to time. Budding enterprises are no different. That is why crowdfunding platforms must implement measures to ensure that its funders are protected. These measures ultimately aim to limit the risk exposure of funders.

Advantages that crowdfunding platforms have over traditional finance institutions
Whilst we have addressed the common misconceptions of crowdfunding platforms, SMEs are still cautious about leveraging these channels. A recent study by DP Information found that a mere 2% of SMEs in Singapore highlighted crowdfunding as an alternative source of funding.¹  This can be due to the lack of awareness and education on the advantages of crowdfunding. As such, we have listed them here:

1) Speed
A key advantage that crowdfunding platforms have over traditional banks is its ability to provide businesses with faster access to finance. The platform skips the middle-person layer and connects borrowers directly to the relevant investors in real-time. For this step to be effective, it is important to choose a platform that serves your niche market.  

2) Greater transparency
Crowdfunding platforms publicly list businesses on the website. It sounds daunting to have your business strategy and finances exhibited openly, yet, this increase in transparency is a means for businesses to demonstrate greater accountability and credibility. Furthermore, the crowdfunding community is a vocal group of people who are willing to share their feedback. This provides smaller enterprises and startups with early market validation and can help the business gain traction.

As the economy is expected to toughen up this year, traditional financial institutions will continue to tighten their credit environment in order to contain potential risks. It is thus timely for businesses, especially SMEs, to consider and explore alternative sources of financing. These sources will offer faster and cheaper access to funding which will ultimately help businesses thrive through 2017.

¹SME Development Survey 2016