P2P lender Validus eyes Singapore banks as new partners
Singapore
SINGAPORE'S largest peer-to-peer lending platform Validus Capital is confident of inking serious collaborations with Singapore banks by early next year to tackle the pressing dearth of financing for small-and-medium enterprises (SMEs), said its top executives.
This comes as Validus has been in talks with Singapore banks for some three years now, and is seeing a shift in attitude toward partnerships as it offers a fresh approach of assessing SMEs for financing.
Co-founder and executive chairman Vikas Nahata told The Business Times in an interview: "I do think (collaborations are) one of the very serious possibilities in Singapore."
Validus matches funds from accredited and institutional investors on its platform to SMEs that need loans. It derives a lending rate via its credit assessment model that mainly analyses trade data from these businesses to gauge the credit-worthiness of each SME. Since starting in 2015, Validus has now matched about S$180 million to small businesses, and earns a fee from doing so.
Other global financial institutions have already been working the platform behind the scenes. Validus has worked with one of the world's largest banks to quietly offer virtual Visa cards for SMEs to make payments to their suppliers. Another non-bank financial institution is testing out loans to F&B firms through Validus.
The next goal is to have Singapore banks lend directly to SMEs through Validus.
What is opening doors for more bank partnerships here is Validus' targeted approach of lending to SMEs with top corporate customers behind them. With four years of experience, Validus now uses its credit assessment model to offer loans to these SMEs at rates as low as 4-6 per cent on an annualised basis, or what banks would typically offer SMEs that qualify under their credit assessment models.
Validus has worked so far with seven large corporates in Singapore, including ST Engineering, large shipyards, and the country's largest logistics and transport provider, to tap the thousands of vendors that hold contracts with these blue chip firms, said Mr Nahata.
These large corporates - with revenues of between S$100 million and S$5 billion - are eager to ensure that their small contractors and suppliers have adequate financing to complete projects on schedule.
"These SME vendors become the weakest link in the delivery chain," said Mr Nahata. "If all don't fall in line, sometimes a project becomes unviable and unstable."
The problem is that many high-growth SMEs today do not have a piece of property to pledge as collateral to banks for loans, as is traditionally expected for SME lending. Indeed, SMEs today may have niche businesses: one working with Validus builds nuclear radiation detectors.
So Validus has worked with top corporates to look at their vendors' track record in meeting payment deadlines, and can offer them financing to kickstart the project. As a gauge, a S$5 million sum needs 10 per cent of financing upfront - or S$500,000 - to buy supplies and hire more staff.
"If his invoice is to an ST Engineering, then honestly, I'm taking the risk of the corporate on the invoice financing. So he gets the lowest rate possible, which is like an ST-Engineering bond rate," said Mr Nahata.
Among the investors in Validus is Temasek Holdings' Vertex Ventures, which helped to introduce the platform to top corporates.
SMEs have been so starved for credit that some find it hard to believe Validus isn't charging money-lending rates. Validus estimates that about 15 per cent of the SMEs it works with, have links to money-lenders.
Mr Nahata cited an example of a young SME owner who built a high-margin business from scuba diving into deep waters to repair ships. The SME owner borrowed from money-lenders at an eye-popping rate of 15 per cent per month.
"Whatever we offered him was one-tenth of his financing costs. He sent a letter, saying: 'Am I going to get the loan? Because I'm happy to pay double of what you're asking me, but I want the money.' And we said, it's fine," said Mr Nahata.
In return, the large corporates are assured of projects being completed, while SMEs secure contracts with the confidence of financial backing, and work closer with these corporates for the benefit of cheaper funding.
"I think the biggest concern that we've seen in this market is the culture of the SMEs - it's that 'if I cannot get a loan from a bank, I probably shouldn't take on the project'. This is a psychological thing that we're trying to change," said Mr Nahata.
Co-founder and chief operating officer Nikhilesh Goel told BT that the platform usually offers the SMEs a short-term loan - just enough for what they need for a project - and avoids the "handcuff" approach that banks take in locking SMEs down to a 18-24 month loan facility.
Validus runs its credit assessment model through fraud algorithms to ensure that invoices are not doctored. Its fraud algorithm is designed using Benford's Law, a rule that suggests that when financial statements are fudged, certain numbers are repeated too many times to be real. Its model also spreads lending across several SMEs to diversify risks.
Validus has had zero defaults from financing vendors of its corporate partners. Its overall non-performing rate for loans overdue for more than 90 days stands at about 2.5 per cent. This is lower than overall delinquency rates for personal loans and credit cards as at third quarter 2018. The platform also provides an insurance cover on most invoice financing facilities.
Half of the funds on Validus come from institutional investors including family offices, with the rest coming from accredited investors. Validus fears that the nascent P2P lending segment is due for a shake-out as platforms will need scale to survive the long haul. And with that, it is worried about those with retail investors.
"We hope the retail lenders on the other platforms will be taken care of, because in China, we've seen some retail lenders lose some serious money... it could be half their life savings," said Mr Nahata.
