P2P Industry Introduction: 6 out of 7
Do you want to be the boss of your own financial situation and make money by being an investor? The goal of this series of articles is to introduce you to P2P lending & crowdinvesting and to help you decide if this asset class makes sense for your investment portfolio!
Risks of P2P Investing was the previous post of the series.
After discussing some of the benefits and risks associated to this asset class, hopefully you have a more clear picture if P2P lending is the right investment for you. Now, if you decided to go ahead and to become a P2P investor, welcome on board!
There are many P2P platforms on the market and it can be frustrating to choose the best one for you. Make sure to invest sufficient time to fully research your options before you commit any capital. In order to give you support, learn about some of the key topics to research for the right P2P platform and what you need to look for in a trustworthy P2P lending company.
Research the Company that Owns the Platform
How easy it is for you to find information about the company that owns the P2P platform? Do they provide any particular information regarding the key beneficial owners and stakeholders on their website? Search every possible bit of information available online about the company structure and key individuals involved to make sure there is no conflict of interest, such as overlapping shareholders between the different entities involved in the platform operations.
If you are not able to find out who are the company owners, specially if they want you to trust them with your savings… make sure you at least know who they are.
Evaluate Team Background and Experience
Is the P2P platform key team members visible on the website? What are their professional backgrounds? How aligned such experience is with the need to develop a successful P2P platform? How much credit and investment experience does the platform’s investment team have?
A team with a strong financial background will be better placed to make sensible and informed decisions regarding loan originators and managing loans. They should also be able to better identify loans that should be avoid.
Check the Platform Transparency Practices
Are you able to easily find information about the P2P platform investments performance? Dues the platform provide any audited financial reports? Is the auditor reliable? How long is the P2P platform operating? Do you have access to all legal documents required to invest, such as User Agreement, Claim Rights, Loan Agreements, Guarantees, etc.)? Are the financials showing a sustainable business model? Remember that although past performance is not a prediction of future results, it is one element in considering where to invest.
P2P platforms typically make money by charging fees to the borrower (and sometimes the investor too) on each loan they fund or particular operation performed. How much they charge should be visible in their website. If the platform don’t have a constant flow of new loans, it won’t be able to survive, putting your investments at risk because the platform is at risk of default.
Due Diligence Check List
- Where are your funds kept?
Your funds must be kept in an account separate from the platform’s bank account. If they default, you don’t want company creditors to recover their loans by using your funds. Your investments, as well, should be kept separately from the company assets. This means that your name must be on the investment and the platform should act only as a nominee. Or, at least, your investment should be in a legal entity separated from the platform.
- What type of loans are available?
Who are you lending to? Are borrowers primarily individual consumers or businesses? Does the platform have a good balance of “borrower types”? Can you rate the loan originators that work with the platform? Are they trustworthy and been on the market for several years?
- How is the underwriting process?
Does the platform publish its underwriting criteria and who signs off the lending decision?
- How securities are valued?
Is there a focus on asset-backed lending? For example, what proportion of loans have been secured against a property or a business? Which process is follow to determine securities value? Any other guarantees to consider?
- What happens in case of default?
Is the P2P platform clear about what happens should a loan go bad and does it have a recovery process in place? What happens? And what are the plans in case a loan originator defaults? What happens? And if the platform fails?
- Does the platform have skin in the game?
Does the P2P platform invest along-side each loan opportunity? This can be a useful indicator as to how aligned the platform is with the interests of its customers, but again other factors can come into play.
- What are customers saying?
Many platforms have dedicated groups in forums and social media where you can find independent customer opinions. From some highly positive to others sharing horror stories, you will be able to assess where reality is. Make sure you check not only for the opinion from customers, but also read any responses submitted by the P2P platforms.
Speak Directly with the Platform!
In the age of all things digital, it can be a good idea to speak to a real person. Face-to-face may not be practical but if you have any queries or concerns then a call can help you get a feel for the people behind the platform and assess if their support team is professional.
What about Regulatory Oversight?
Regulatory body approval (such as FCA in the UK) should provide some comfort but it is important to bear in mind that it does not guarantee the quality of a platforms’ loans or returns. Don’t assume that because a lending platform carries an regulatory body logo that your money is safe. Research your platforms thoroughly and consider the points outlined above; regardless of whether the lending platform has regulatory body approval or not.
In summary, not all platforms are created equal. Make sure to invest time and compare offerings across different P2P platforms in order to choose the offers that most closely are aligned to your risk appetite.