I’ve been investing in P2P Lending platforms for the past 6 months and have learned quite a bit about this type of alternative investment. Now, if you don’t know what P2P Lending is, I recommend you check out this piece, which explains very thoroughly. Basically, you’re lending out money to SMEs that need the fund. In this article, I’ll share what I’ve learned and hopefully, you can decide whether investing in P2P Lending suits you.
I’ve invested in more than 100 loans, using three platforms: Funding Societies (Singapore), Capital Match and Minterest. I’ve gained roughly 7% return since I started, which I’m quite happy with, and that includes one defaulted loan. Depending on your risk appetite and loan choice, you’ll likely get a different return. Let’s dive right in.
Understanding Different Loan Products
You should always know what you invest in. Loan products are complex and take some time to understand, so bear with me.
1. Invoice Financing
Imagine company A provides service or sells goods to company B. If cash isn’t paid right away, company A then issues an invoice, which typically includes the amount of time company B has to pay company A back, usually a few months. If company A needs immediate cash, it can borrow money using that invoice with company B as collateral. This way of getting capital is called Invoice Financing (IF), whereas company A is the seller (of the invoice) and company B is the debtor.
Still don’t get it? It’s okay, the first time someone explains to me, I didn’t too. Maybe watching this video will help!
The difference between Notified IF and Non-Notified IF is where it gets more confusing. Notified IF is when the debtor, or company B in this case, is notified that company A, the seller, has used the invoice. Non-Notified IF, on the other hand, means the debtor has no idea the invoice has been used for IF.
It’s obvious, Notified IF has much less risk for investors like us. Not only the P2P Lending platform can easily verify it’s a legitimate invoice by contacting company B, or the debtor, but also in most cases, the debtor would pay directly to the P2P Lending platform. In this scenario, there won’t be further delay in payment by going through company alike Non-Notified IF, which can affect an investor’s return.
Phew, that probably was very dry and I hope you understand. Kudos for reaching this part!
2. Business/Term Financing
This is simple. Basically, a business applies for loan, typically for expansion. The P2P Lending platform then accesses how risky it is to lend money to this company, determines the interest rate using their credit underwriting process and crowdfunds money from investors.
Many of my friends consider this product safer than Invoice Financing, but in fact, it’s way riskier. There’s nothing as collateral! You should determine whether the return is high enough to compensate for the risk you’re taking.
3. Property-Backed Financing
So far, it has only been offered by Funding Societies. As the name suggests, the collateral, in this case, is a property, so it’s safer than Invoice Financing and Business/Term Financing. Since it’s safer, your return is likely to be lower as well.
4. Simple vs Effective Interest Rate
Simply put, an effective interest rate is the rate that has factored in the compounding effect. Invoice Financing (IF) hasshort-termerm of investment (usually 1-3 months), so continuously reinvesting your money after the debtor pays back gives you a higher annual interest rate.
Personal Takeaways After 6 Months Of Investing
Though 6 months is rather a short time span for investing, I’ve learned quite a few things about investing in P2P Lending platforms.
1. Choosing the Platform and Loans Carefully
Since the P2P Lending platform will do all the credit underwriting process for you, so you should find one with good reputation. Checking reviews on Seedly helps!
To my knowledge, Funding Societies and Capital Match both host investor event/seminar where you can clarify your doubts. Alternatively, you can also talk to customers supports and do other researches. There’s a P2P Lending forum but it’s facilitated by Funding Societies staff, so there might be some bias.
You should also pick loans carefully. If it’s Invoice Financing, check who the debtor is, because after all, that company is responsible to pay for the loan. If possible, check the financial health of the debtor and it tends to give me a peace of mind if it’s a large, publicly listed company. For Business/Term Financing, it helps to do research about the company.
For such a risky product, you’re better off if you’re diversified. If you have 50 loans at a time, it’s alright because if one loan has defaulted, your portfolio isn’t largely affected.
3. If Possible, Do Your Own Accounting
If you have time, tracking your investments is always a good idea. Keep a spreadsheet to know how much you lend to each debtor and also, you can track if that company pays on time, so you’ll have a better idea which loan your money should go to in the future.
Seedly Contributor: Edward Nguyen
Edward Nguyen hopes that his humble advice as an investor who has made a ton of mistakes can benefit many Singaporeans embarking on their investing journey.
Editor’s note: This article written by one of Seedly’s Community members gives very useful personal insights on P2P lending, especially for those who are thinking of starting out to do so. For readers who are interested in this topic, check out our P2P Lending Platforms comparison.
If you have any questions along the way, feel free to ask away while you’re at it. Don’t worry, we are all here to learn!