Becoming Involved in Peer-To-Peer Lending

There are questions that potential lenders should ask in due diligence if they wish to be involved in peer-to-peer lending. So, what are they?

There is one good reason why financial advisers favour to talk about risk-adjusted returns — it isn’t possible to work out whether a 5% yield signifies a success or a failure if we are not going to consider the risks one took to accomplish it. Today, making 5% per year on a savings account would be an outstanding result; making 5% per year on unsafe peer-to-peer lending to small scale companies would not look so sensible. The bottom line is — returns are what you get after risk-taking.

BondMason’s chief executive, Stephen Findlay stated: “P2P lending through an online platform may be a modern activity, but traditional banking should be at its core: people, relationships and a firm understanding of credit are key for a P2P lending platform to be credible and to succeed.”

The institutional stockholders are the ones responsible for other individuals’ money. No one likes having to clarify to the customers why a portion of their money no longer exists. This is the reason why they ponder harder about the risks they are running. Furthermore, this explains the reason why the queries they ask as part of their due diligence on the investment opportunities offer a valuable guide for anyone else.

So, what questions should an investor inquire if he wants to become a part of peer-to-peer lending?

The people and company information. Perhaps the most significant aspect for most financiers is the team. How knowledgeable are the people involved and how solid are the procedures that the company conforms to? Even though online peer-to-peer lending for companies is a very young trade, the products it is offering have been existing already for a few years now. Having a senior team with an experience of at least twenty years each is vital for the funders. Moreover, the funders often ask for the staff’s individual biographies. While other funders want to know about the platform’s shareholders, their corporate background and subordinates, as well as their bankers, lawyers, and accountants.

How does the business work? It is essential that any peer-to-peer company can clarify accurately what its investors/lenders are putting their money into. What types of applicant does the company take and reject? What assortment of deal size does it finance and over what period? How does it set the rates? What rates do businesses pay to raise funds through the platform? What gross and net returns do investors make? What fees does the platform charge to each party? Who is accountable in the event of a non-payment?

Risk management. This is the core of the matter for most establishments. How does the peer-to-peer firm assess businesses that want to use it for financing? What checks does it run on the managers and owners of companies that apply to use it? What quantity of applicants are disallowed and why? Can the platform write down the procedure it follows to screen the creditworthiness of each company it accepts, as well as the creditworthiness of the customers that are due to pay the invoices that investors are being asked to purchase? How are invoices proved as authentic and how does the P2P platform check they have been received by the customer? What information does it deliver to funders about the financial robustness and risk rating of each business that raises funds by selling its invoices? What precautionary measures does it take from these businesses to lessen the risk of a default? How does it define principal concepts such as “arrears” and “default”? What procedure does it have for handling late payments and recovering defaults? What are its recent and historic default rates? Can it show that its funders’ capital is isolated from its own corporate funds? What cyber-security measures does it take?

Communication absolutely necessary to investors. How does the platform connect with the investor on opportunities, performance, and defaults? Does it clarify how to complain and set out details of its complaints policy and procedures? What reporting does it make available for the investors? Does it give a detailed presentation of how it works for funders?

Institutional investors ask quite a number of comprehensive questions and P2P platforms must show that they can deliver solid answers supported by written evidence. As part of this method, it is chiefly important that potential investors should be able to access complete and updated information on arrears and defaults. But, as well as documents and questionnaires, it is also important that investors are able to see the people behind a peer-to-peer lending platform so that they can make a judgment about them as people and see the team at work close up.

Successful peer-to-peer platforms must intend to promote well-established, transparent relationships with funders and guarantee that they realise the risks and are pleased with the processes that are used to handle those risks.

One way to help provide answers is to check out the P2P platform’s FAQ section – may reveal a lot!