1st January 2016
With even more P2P investment opportunities available online, do you have the tools you need to assess each and every opportunity? Navdeep Arora, Director of Risk management at Crowd2Fund, has listed 5 key things to look out for when reviewing a P2P investment opportunity. These points should be taken with industry wide context. At Crowd2Fund we only list profitable growing businesses for you to lend to.
1.Borrower default
This is the biggest and most obvious risk. If the borrower defaults and fails to repay their loan, your investment is at risk. When choosing investments you must ensure that you have done a thorough analysis and ask yourself if you were provided with enough information to make right investment decision. Do a quick feasibility check – i.e. is the business is profitable and is there positive net worth (assets minus liabilities). Find out how long they been trading and look into the Director’s experience. Also, it would be good to check that there is enough collateral in case borrower defaults. This means the investment may be recoverable. Remember, generally the higher the return the higher the risk.
2.Spread your investments
You should spread your investment across products, borrower risk, sector, and even platforms. ‘More risk, more return’ is a common saying, but it is not worth taking high risk if you are not spreading that risk. Spread your portfolio across debt products, equity and rewards.
3.What about the P2P platform?
Do you know if your investment is safe if the P2P platform goes bust? Is there a security trustee who will manage all borrower and investor funds? Check the platform’s website, or within their terms and conditions, if there is a back-up plan/serving company who will take over. For regulated platforms like Crowd2Fund this is a requirement, so regardless the loans will always be serviced for both investor and borrower.
4.The platform’s default rate
Do you know what the default rate of the platform is? It may be the case that their credit policy or acceptance criteria are not stringent enough. As competition is increasing in P2P space, platform operators are taking on more risk to increase volume of applications on their platform and, therefore, something you must look into. Crowd2Fund’s current default rate is at 0%.
5.Not all P2P investments are failsafe
With the recent increase in the P2P lending platforms, not only is there an increase in platforms, but also platforms that are taking more risks and offering high rates to investors for higher returns, but with low quality borrowers. The risk margin can be wrongly mispriced to increase volume due to peer pressure. Lending money is easy but the real test comes when recovering money. Invest in both lower margin quality businesses and higher margin higher risk deals to cover your risk.
P2P investments are not covered under FSCS (Financial Services Compensation Scheme) scheme. FSCS is the compensation fund of last resort for customers of authorised financial services firms. These investments are savings in the bank account where certain part of your saving is secured.
There are many P2P lenders which failed and closed after only being in existence for a few months – Some of them are Squirrl, Quakle, Big Carrots and Yes -Secure (Encash).
If you want to read and understand risk more then we recommend you take a look at our risk section and when you are ready, then visit our latest opportunities to start testing our check list!
