P2P: Why SME Debt Is A Must-Have For Any Investor Portfolio

Thanks to the rise of peer-to-business (P2B) lending, the concept of Small and Medium Enterprise (SME) debt as an asset class has altered for the better. With low risk of default and high-interest rate returns, it is now possible to invest in SME debt at low minimums. A forward-looking investor would do well if SME debt can be considered in a balanced portfolio.

Opportunities in SME Debt

A longstanding issue with SMEs is access to financing. This is because banks typically require two to three years of profitable operations, they might also demand a high degree of collateral.

The unmet SME financing needs have thus created an opportunity for the rise of alternative financing models, such as ​peer-to-peer lending platforms powered by fintech. Pooling private credit from accredited investors, money can be loaned to carefully screened SMEs, and the minimum buy-in is lower than typically needed for bonds sold at the private banking tier.

SMEs can use the funds as working capital or as a way to shoulder smaller financing needs, such as purchasing equipment or implementing digital systems. They repay the loans with interest, allowing investors to see returns that are typically higher than 7% per annum.

To protect investors, P2B platforms may provide insurance in the face of defaults and hold investor funds in an escrow account. They also screen SME borrowers for creditworthiness.

With due diligence, government regulation, and data analytics, most P2B platforms in Singapore see default rates of lower than 1%.

As an added advantage, the process of investing in SMEs through P2B platforms can be done online, in a matter of minutes once registration is complete.
Other key benefits are:

High Absolute Returns

The returns from SME debt are absolute, as dictated by the terms of the loan. For investors, this consistency makes it easier to plan financially, such as requiring a certain amount for a down payment on a house.

When investing in stocks and unit trust funds, the returns are usually variable and based on a benchmark index, like the performance of S&P 500. SME debt is independent of these factors, and might guarantee returns from interest rates of close to 7%.

Diversification of Risk

Assume you have an investment amount of $100,000. It could be less risky to spread this out as $1,000 in 100 companies, rather than invest all of it in a single entity.

This ensures the entire investment amount will not be wiped out in a single default, such as the unexpected case at ​Hyflux​. The maker of water infrastructure solutions from Singapore almost left 34,000 retail investors with the possibility of facing up to 90% loss of their capital.

With P2B lending, investors can spread their investable capital over different companies, screened for their creditworthiness by artificial intelligence and other data-driven tools. This reduces the odds that a downturn in a single industry will derail investment plans.

Simple Structure

Many high return products tend to have complex structures. For example, structured notes may involve multiple debt assets with different risk profiles, or an unseen mix of entities and assets. All of this makes proper risk assessment difficult.

By comparison, P2B lending has a simpler structure. Investors will always know who you are lending to, and what the exact terms of the loan are.

In the unlikely event of a default, the investor will stand to lose the amount loaned to the SME. At most, investors stand to gain the debt repaid in full, with interest. This makes investing in SME debt relatively simple for risk assessment.

Short Maturity Period

Given uncertain economic conditions, investors need to stay agile. In the present economic climate, the combination of low-interest rates and high volatility does not favour the use of long term fixed deposits. It is difficult to stay liquid if capital is locked up in products with maturity periods of over a decade.

With loan tenures of 12 months, P2B loans that finance SME debt have short maturity periods. This leaves investors with more freedom to reinvest, as well as respond to opportunities and threats as they arise.

Worthy Consideration

SME debt is ideal in constituting the high-return portion of a balanced portfolio. Its high-interest rate offsets the lower returns of more defensive assets, such as government bonds or fixed deposits.

Indisputably, there is a place for SME debt in an investor’s portfolio. While some believe that SME debt should be an alternative asset class, others argue that it should be treated the same as high-yield bonds.

Either way, it is clear that SME debt can play a vital role in a well-balanced portfolio.


X.Y. Ng is VP, Marketing of Validus Capital, a leading P2P lending platform in Southeast Asia that connects accredited investors with SMEs requiring growth financing.

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