Peer-to-Peer (P2P) lending is a major source of alternative investments for investors looking to earn interest returns from financing business loans. It is often attractive to investors due to its higher interest rate returns and the autonomy investors have over which business they want to finance. However, as with every form of investment, it will be smart for you to look into a few areas before you start investing in P2P investments, for you to ensure that you are making informed decisions about your investments!
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Understand the platform you are investing with
First things first, do your research. As with any investment, you want to do your due diligence before you take the plunge by understanding how P2P lending works. Start by researching as many P2P lending platforms as possible. Look up their websites and read their profiles. Find out how safe it is to invest through their platforms, what happens when loans default, and what happens if the platform goes bankrupt. Read their FAQs thoroughly. If a platform doesn’t share many details, that can be a red flag.
A good platform that you can consider investing with is Funding Societies, Southeast Asia’s biggest peer-to-peer (P2P) lending platform that is licensed by the Monetary Authority of Singapore (MAS) You can start investing in loans from as little as $20 and there are many attractive investment opportunities available on our platform. To learn more about us, click on our website here.
Determine how much you can invest
It is generally a good practice to invest only surplus cash. Do a thorough analysis of your expenses and finances to determine how much money to put in. You can also consider forecasting your earnings and expenditures for the next 5 years to predict if there are any major life events that will require you to set aside money for. After determining the amount of surplus cash you have on hand, you may consider starting small in your investments. The key is to start with a small amount (for around 3-6 months), learn the ropes, then invest with greater confidence and a better understanding of your investments in the future.
How do you plan to select the loans you will invest in? There are many different types of loans available, with varying term lengths and credit scores. The types and quality of loans that you select will largely be a function of your risk tolerance. Before you begin building a P2P loan portfolio, it’s important to come up with a game plan as to how your funds will be invested.
Based on the above loan data we researched and collected on borrower businesses, Funding Societies prepares a Loan Factsheet for Investors considerations that will be available for viewing during the pre-crowdfunding period. It displays our credit assessment and figures in a readable format so that investors will have better clarity on the company’s background and will be able to make a more informed decision when selecting which loans to invest in.
Find out more: Understanding the Loan Fact Sheet
Understand how the P2P platform you’re investing with conducts its credit assessment on borrower businesses.
Here is how Funding Societies does its due diligence (may vary on a case to case basis):
- Site visits (Physical verification)
- Sighting of original documents (bank statements, invoices etc.)
- BRI (Business interest and litigation info) on Directors & PGs
- BRC on Company
- CBS (individual credit facility) of PGs
- KYC/AML checks
- Due Diligence checks on debtors (for IF)
- Financial Analysis
Find out more: How Funding Societies Conducts its Credit Assessment
Diversify your investments
Diversification in the context of P2P investments is to distribute your funds across as many loans as possible to potentially minimize loss in case of default. Let’s say you invest SGD 1,000 in only one loan with an interest rate of 10% p.a and 12 months tenor. If all goes well, you‘ll receive a total of SGD 1,100 after the loan period has ended. However, in the worst-case scenario, there is a chance where the loan you invested in may default and you may end up making a loss on your P2P investment.
However, imagine if you diversify your investments by investing SGD100 each for 10 different types of loans instead. By investing in more than one loan, you may potentially reduce your risk in the case where a loan is to default, the principal amount lost would not impact the entire portfolio heavily.
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We hope that these 5 tips will arm you with sufficient confidence and knowledge as you embark upon your P2P investment journey!
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