Complete P2P Investing Guide
jackchan last edited by kaeley-wn
Hey everyone, we thought that it would be good to consolidate all the useful information we have into this sticky thread so members who are new to P2P can get started quickly!
What is P2P investing?
P2P investment or crowdfunding is a simple concept.
In P2P crowdfunding, there are 3 stakeholders: the borrower, lender and intermediary.
Borrowers usually consist companies who have cashflow needs, seeking to borrow money for purposes of expansion and meet working capital needs.
Lenders, typically retail investors (like you and me, hence ‘crowdfunding’) provide funds to borrowers for an agreed interest rate. They can pick the companies they want to lend to.
Finally, the intermediary simply connects borrowers to prospective lenders through their platform, charging a fee on both ends.
Why invest in P2P financing?
History of P2P investing: is this something new?
P2P investing has been around for more than a decade. It is not a novel concept. With the advent of technological advancement and internet accessibility, this paved the way for financial technology (FinTech) solutions to traditional problems.
Zopa was the world’s first P2P platform, founded in 2005 in the United Kingdom.
Since then, P2P firms have been springing up in UK, US, China and Europe on an accelerated basis. Today, P2P lending aims to serve the needs of the unbanked and the underbanked most prominent in areas of Southeast Asia, India and China.
How does P2P investing differ from traditional investments?
Traditional investments refer to buying stocks, currency markets and purchasing bonds.
On the other hand, P2P investing is a relatively new concept. Basically, it allows companies to crowdfund for loans, taking on debt as opposed to selling equity.
P2P investing is conventionally considered riskier than traditional investments. This is because most of the loans are collateral-free as businesses who turn to P2P platforms are either too young or are in asset-light forms of businesses.
Loan tenors are much shorter in P2P investing, ranging from 15 days to a year (depending on loan types). The traditional equivalence of loans are bonds, which can last for years. Short loan tenors are attractive for investors because it provides more liquidity and higher compounding interests earned over time. You can reinvest your earnings into more loans and grow your principal much more quickly than traditional investing.
Of course, higher earning potential comes with higher risks.
Read more or share your thoughts here:
P2P vs Stock Market
Who am I lending to and what do I get in return?
There are many types of crowdfunding:
- Debt Crowdfunding
- Equity Crowdfunding
- Property Crowdfunding
- Donation-based Crowdfunding
- Rewards-based Crowdfunding
The first two, debt and equity crowdfunding, are most pertinent and popular methods of financing for small and medium-sized businesses. Debt crowdfunding usually meets their short-term cashflow needs, while equity crowdfunding is usually for early-stage startups.
In debt crowdfunding, lenders receive interest payments proportionate to the calculated risks.
In equity crowdfunding, lenders receive shares (ownership) according to the amount invested.
What kind of returns can I expect?
Interest rates paid by borrowers are typically higher than conventional bank loans due to the nature of P2P loans. These loans are not backed by assets.
P2P companies usually offer returns of 10-20% annualised interest rates as returns.
Why is the interest rate for lenders so high? It sounds too good to be true.
P2P companies set interest rates based on credit risk of the company. Companies are also willing to pay for such fast loans to meet their working capital needs in the short term.
What is the profile of borrowers typically? Are they always bank rejects?
Yes and no.
To qualify that statement, borrowers approach P2P platforms for financing for various reasons which may or may not be due to rejection from banks.
Companies usually turn to P2P platforms for reasons such as:
- Lack of assets to be used as collaterals
- Lack of / poor credit history
- Lack of proper financial records (usually unaudited)
- Very short processing time compared to banks
How are companies assessed for their creditworthiness?
Click here to read more on Funding Societies’ credit assessment.
What are the platforms available for P2P investing?
- Capital Match
- Validus Capital
- New Union
- Crowd Genie
- Funding Societies
- B2B Finpal
- Nusa Kapital
- Funding Societies MY
Share your opinions here:
How to know if company is worth investing in?
What risks are involved in P2P investing?
- Default risk
Companies may default on their payments. This cannot be entirely eliminated, just reduced.
- Lack of transparency
Investors have to trust the due diligence and credit assessment methodology of P2P platforms conducted on respective companies. To protect borrowers, P2P platforms normally refrain from revealing borrowers’ identities.
Understanding risks involved in P2P lending
How can I diversify my investments to mitigate my risks?
Diversification can take place in two manners. You can invest broadly across different industries and invest in as many borrowers as you can.
If you have a sizeable stash of cash to invest, it is wise to put your money in different asset classes to hedge against losses. The typical investor’s portfolio comprises stocks, bonds, index & trust funds and property.
Share your portfolio or learn more from our members here!
Diversifying your portfolio
How diversification can help to minimise risks in P2P lending
What happens if there is a default? Will I lose all my money?
Contrary to popular opinion, having a ‘default’ does not mean the company will never repay their debt.
Default is defined differently by different platforms. If the platform determines that when a repayment is past 90 days its due date, then it will be considered a default.
There are various measures to handle a default but the principle is always for platforms to seek the most cost-effective methods to recover the payment, escalating the measures taken only when absolutely necessary.
Moreover, loans are always backed by personal or corporate guarantors. Thus, P2P platforms can call for legal action against the guarantors to claim repayments.
Have other questions? Post it in this thread and we will add it into this guide!
This is an ongoing thread, feel free to comment to help newer members of the community get started!
Disclaimer: Nothing in this article should be construed as, constitute, or form a recommendation, financial advice, or an offer from Funding Societies. We are not to be held accountable for any losses on any investments made by readers. The content and materials made available are for informational purposes only.
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