Having operated a P2P lending platform for over five years, we've seen many strategies and styles. We would like to share some of these with you. However, firstly we must acknowledge that every lender's risk appetite is different. It is important that you consider the risks and your personal circumstances before making a commitment to lend money. The following tips are intended to educate and provide non-personalised guidance to assist.
- Engage with borrowers. Consider each business and make use of the discussion forums. Would you buy from them? Do you know someone who might? What risks might the business be susceptible to? If you can see yourself becoming a patron, that’s a positive step. Consider whether the borrower has thought about the risks to their business and how they have planned to mitigate them.
- Compound your repayments. Idle money doesn’t earn; by re-lending or withdrawing the interest you earn each period, you can improve your net return from the platform.
- Bid early. Avoid being outbid at the last minute. This can mean tying up your capital for a week or two longer, but often means you will be the last to be outbid, improving your chances of earning your original interest rate. However, don’t shortcut your evaluation of the business.
- Consider incentives and offers. Inducements can add a nice boost, but don’t let them sway your decision. Everyone likes the sense of getting a deal, but consider if you would still make the same decision without the incentive. Where incentives apply, check the terms and conditions to understand how you may be eligible.
- Buy microloans as repayments are due. Interest is paid to the owner of the microloan on an incumbency basis, which means that if you own the microloan at the time the repayment is distributed then you get the pay-out of the interest for the full month that has passed. Always remember to review the repayment record and financial history of the businesses listed on the secondary market prior to purchasing.
- Consider the maturity. Older loans may be more likely to refinance than newer loans (those within the initial 50% of their term). So if you are buying at a premium, you should consider that you may not receive every interest payment that is due over the remaining term. Also, a long and healthy repayment performance history can be a good sign when assessing the creditworthiness of a business.
- Be prompt when selling non-performing loans. Whilst it’s not uncommon for a business to fall one or two days behind, don’t be afraid to discount and sell out of a loan that falls behind with a repayment. Once a loan is 30 days past due, some platforms will suspend trading on loans, in anticipation of the loan falling into default. Some lenders using the secondary market are looking for a deal. We make it clear if a loan is behind with a repayment, so buyers acknowledge there is a risk associated with buying discounted loans.
- Read the updates. Some businesses have significant cash fluctuations. Some updates will state the reason behind a missed repayment. Use this information to consider selling (as described in point seven) but also for buying… if a lender has substantially discounted their microloans, then they may represent good value, if the business repayment performance recovers. You’ll need to use your judgment carefully, but there are some deals to be had from nervous lenders.
- Expect a level of defaults. Lending carries risk, and regardless of how well you manage your portfolio, at some point it is likely that you will sustain a default. It is not unusual for lenders to earn above-average returns on a platform at the outset. Expect your net return to ‘normalise’ between four and six years, when they are experiencing recoveries and new defaults at the same rate.
- Sharpen your decision-making skills. By taking a studious approach, you can learn from your mistakes and identify patterns. For example, by correlating the experience of the Director and their intended purpose for the funds, you can interpret a borrower’s ability to put the capital to use in their business. For example, has the director shown that they have grown in this manner in the past (perhaps with a previous business)? If not, how likely are they to get this decision, that they are making with the funds they borrow, right first time? Can you see a risk in this strategy that the borrower hasn’t? Don’t be afraid to ask if you’re unsure.
