Working capital financing purpose and platform credit risk assessment in peer-to-peer SME lending

Peer-to-peer (P2P) lending platforms convert borrower information into credit grades, yet little is known about how they interpret the stated purpose of a loan. Drawing on signaling theory, this study examines whether working capital financing purpose, accounts receivable (AR) versus accounts payable (AP) financing, moderates the relationships between loan amount, loan duration and interest rate and the credit grade assigned by Funding Societies, Malaysia’s largest P2P lending platform. Using 1,075 hand-collected SME loan listings and a partial proportional odds model, the study finds that the informational value of financing purpose depends on where in the grading scale it is used. AR financing is associated with a lower probability of medium-risk classification in every ordinal specification. Its association with high-risk classification strengthens with loan duration, a result robust to propensity score matching, and with loan amount, a result that does not survive matching. The interaction between financing purpose and interest rate has opposite signs at the low–medium and medium–high grade boundaries, indicating that the platform’s grade–price relationship differs by financing purpose. The study extends signaling theory by showing that, when an intermediary converts signals into ordered grades, one signal can carry different information at different decision boundaries.