Peer-to-Peer(P2P) Lending, or debt crowdfunding, has grown tremendously since the concept originated in 2005 with Zopa in UK. In 2016 alone, P2P lending has generated more than $300 billion worth of investment opportunities worldwide. The concept helps the underserved or underbanked individuals and businesses access alternate sources of funding from investors who lend and earn passive income in the form of interest.
Southeast Asia is an emerging P2P lending market with a huge financial gap faced by SMEs. In the last 3 years, P2P lending has financed thousands of small businesses to support their growth, while offering investors an alternative investment opportunity. In Southeast Asia, one of the leading platforms, Funding Societies has funded more than S$120 million across Singapore, Indonesia and Malaysia. At the same time, they have given more than 45,000 investors access to this alternate investment class with net annualised returns of up to 14% in short tenor loans.
This article aims to highlight 4 important considerations to maximize your returns in P2P lending with examples of initiatives taken by Funding Societies:
Choose your platform wisely
When investing, you want to choose a platform with decent track record and achievements. These are things to look out for in a good platform:
a. The platform has good risk management practices
Review the platform’s risk management – including filtering out bad quality loans, pricing returns as per the risk, and managing non-repayment and defaults. While most platforms do not publish their proprietary methodologies, their processes should be robust enough to identify potentially bad loans. A good indicator is the platform’s default rates. Funding Societies has a default rate of 1.3% (as of 7 March 2018), one of the lowest in the region.
To illustrate, here is an example of the impact of a low default rate:
Assuming gross annual yield of 12%, platform fee of 2% and default rate of 3% (on the higher side) one can make 7% in returns.
This of course is not assured but depends on many factors including platform’s risk management as mentioned above.
In the inevitable event of a late payment or default, it is essential for the platform to have a process to manage collections or exercise legal action. You should enquire the platform on its processes to have a better understanding and clearer expectations.
b. Skin in the game
Find out if the platform has YOUR interests aligned with theirs, and what’s in it for them to ensure that investors’ money is handled properly and the investment opportunities/loans are of good quality.
Firstly, the platform should know how to handle your money. Funding Societies is the first P2P financing platform in Singapore to engage an independent escrow agent to handle investors’ funds, keeping its operating funds separate from investors’ funds. This gives investors peace of mind knowing that their money is safeguarded by the escrow agent and will not be utilized for anything besides their investments.
Secondly, is the platform as invested as you are? The management at Funding Societies has a ‘skin in the game’ by investing in every single loan, and will do their best to maximize the returns and manage any negative impacts.
c. It cares about YOUR Experience!
Debatable – but a good platform should be all-encompassing in its experience, right? This should start from the platform, mobile app (convenient for you), and customer experience. More importantly, it should be responsive and helpful when you need to speak to someone.
Understand macroeconomic conditions
Knowing the pulse of the economy will help you when you select the loans to invest in. This includes updates for each sector and government initiatives to boost SMEs and specific sectors.
Coupled with the factsheets provided by P2P lending platforms that state the company’s operational and financial health, you will gain a wider perspective of the economy and SMEs you are funding.
Diversify your investments within the platform
As the saying goes, “Don’t put all your eggs in one basket”, the same goes for investing in P2P lending. Diversifying across many loans has its advantages specifically in spreading the risk across many loans and helping to minimise the impact of non-performing loans.
Funding Societies endeavours to provide ample opportunities to diversify your investments:
- I. Participate in multiple loans with small amount (at times as low as $50)
- II. Consider spreading the weightage of your investments in terms of loan amounts
- III. You have the option to choose the industries to invest in.
- IV. Funding Societies currently provides Business Term Loans and Invoice Financing for investment. You can consider both products when investing.
Using the Auto-Invest feature simplifies your road to diversification. All you have to do is set your criteria based on product, industry, tenor, rate of returns and industry. When an investment opportunity matches your criteria, you will be allocated the investment based on the auto allocation algorithm.
Re-invest for compounding effect
When investing in P2P lending, repayments are made on a monthly basis (30,60,90 days in case of invoice financing), and you can decide, based on your risk appetite, whether to reinvest the repaid funds and thereby compound the returns.
Southeast Asia’s leading crowdfunding platform, Funding Societies, currently operates in Singapore, Indonesia and Malaysia. With more than 45,000 investors and being the only P2P lending platform to win the MAS FinTech Award (SME category, 2016), Funding Societies has also attained global recognition, being recognised amongst the Top 250 FinTech companies globally by CB Insights and winning the Best in Customer Experience for Alternative Financial Services by Retail Banker International.
Want to start investing in P2P lending? Sign up with Funding Societies today!
This article is contributed by Funding Societies.
It should not be construed that Moneydigest is endorsing this article or any of the products and services provided by Funding Societies.
Nothing in this article should be construed as constitute or form a recommendation, financial advice, or an offer, invitation or solicitation from Funding Societies to buy or subscribe for any securities and/or investment products. The content and materials made available are for informational purposes only and should not be relied on without obtaining the necessary independent financial or other advice in connection therewith before making an investment or other decision as may be appropriate.