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4 Things About Your Personal Finance To Handle Before Thinking Of Starting Your Own Business

Prime Minister Lee Hsien Loong made a trip down to Silicon Valley earlier this month to visit some of the top start-ups in recent years. During his trip, he met some of the top entrepreneurs in the world over including Facebook’s Mark Zuckerberg and Tesla & Space X CEO Elon Musk.

Starting your own business is not easy, especially if you are not born with a silver spoon. Aside from needing a top notch idea, a great team for execution, the perfect timing, the right investors and a nice dose of luck, you also need to get your own personal finance in order…first. Failure to do so would cause unnecessary stress to an already stressful career.

Before you think of taking the plunge to be your own boss, here are some personal finance matters that you should consider first.

Read Also: 5 Signs You Are Ready To Change Your Job

1. Can You Embrace A Simple Lifestyle?

When you run your own business, a large part of the effort you put in is to grow the business for tomorrow. Start-ups or new businesses do NOT work for today. They work for tomorrow, while balancing today’s need.

When you hustle, you hustle for tomorrow.

This has two main implications.

The first implication is that if (and that’s a big “if”) the business succeeds, you get to enjoy the long-term value that it brings to you, its shareholders. That could be in the form of passive income to shareholders or a big exit through an eventual sale of the business.

The second implication is that you are not going to be paid well (if any) for running this business of yours today. And that “today” can easily last 4 to 5 years.

Forget about flashing your CEO namecard at clubs or buying expensive bottle of drinks for your entourage, you wouldn’t be able to afford it. Those restaurant meals that your friends are enjoying may also be out of the question.

Rather, homecooked dinners followed by cheap coffee are likely to be the norm. So would squeezing onto the train to get to work each morning.

Billionaire Elon Musk once lived on about $1 per day in his college days. The reason for him doing so was to test himself if he really had what it takes to be an entrepreneur, and be able to survive under extreme circumstances. Elon Musk rational was that if he could survive on $30 per month on food, then it shouldn’t be too difficult for him to earn and survive on that amount as an entrepreneur.

He could. Can you?

2. Are You Able To Endure Being Underpaid?

Businesses take time to grow. If you are creating a start-up (i.e a business that nobody has done successfully), you will need even more time to grow it.

People who work regular jobs expect to be paid salaries that commiserate with their average output. When we are worth $3,000 per month as a fresh graduate, we expect to be paid that amount. When our skills and experiences increase, we expect to be paid more.

When you are working on your own business, this logic needs to be thrown out of the window. Even if you are the super employee/boss of the company doing everything from closing business deals, delivering great products and services to your clients and being a one-man accounting team, you might still be paid $2,000 per month – for doing a great job.

You might be working harder and smarter than all of your peers and still be earning the least amount of money among everyone whom you know, at least for the first few years.

Can you handle that?

3. Can Your Family Cope Financially With Your Decision?

Most of us have financial commitments in life. Some of these commitments are long-term, such as paying for the home mortgage and taking care of the needs of our children and elderly parents.

Like it or not, financial commitment to our family is one thing that we cannot get ourselves out from. You might be able to live a simple life, but your family would need to be able to cope and live with that decision you are making.

The hard and unfair truth is that not all of us are born into family that can manage the stress of financial uncertainty.

4. Do You Have A Strong Savings Plan?

Even if your business eventually turns out to be sustainable in the long run, personal cashflow challenge is one aspect that you cannot ignore.

Most businesses have cashflow challenges. Account receivable is one area that finance managers are always keeping a lookout of because poor management of your cashflow can potentially sink an otherwise profitable business.

From an individual standpoint, there might be days where you might need to allow your business to owe you unpaid salary in order to stay afloat. Your personal savings will have to step in for these challenging days in order for you to tide over short-term cashflow difficulty.

Read Also: 5 Reasons To Quit Your Job Even If You Have Not Found A New One

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

6 Different Types Of Alternative Investments You Should Consider

Whether you’re just looking, or starting out in investing, it will be helpful to understand the major instruments with which people tend to invest. This video gives an overview of 6 main investment options, as well as their qualities and characteristics. 

Read More: Starter’s Guide: 6 Different Types of Investments For You To Consider

Read Also: This App Can Help You Kick Start Your Investment Journey

Find out more about alternative investing at Funding Societies here.

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

 

How Technology Can Revolutionise The Way We Invest

The older generations love gold and properties as their mode of investment and method to hedge against inflation. With the advancement of the Internet and technology, the new generation of investors are now more well-equipped with information and new investment opportunities. This is especially so in recent decades, when the huge leap in technology opens up a whole lot of new sub sectors in the digital industry which can potentially revolutionise the way we invest.

Let us look into 5 growing digital sub sectors and how it can create new investment opportunities.

1. Crowdfunding

According to Investopedia, Crowdfunding refers to the use of small amounts of capital from a large number of individuals to finance a new business venture. Typically, crowdfunding is either reward-based or equity-based.

For reward-based crowdfunding, entrepreneurs or inventors will pitch their product idea to investors, in exchange for a free or discounted finished product. An example of such crowdfunding website would be Kickstarter, the world largest reward based crowdfunder where over US$2 billion has been pledged by more than 10 million people since they launched in 2009. Oculus Rift began as a Kickstarter project 3 years ago, and eventually raised US$2 billion. Pledgers of the project were promised to get the upcoming Oculus Rift for free (how we wish we knew this project back then!) However, this type of crowdfunding is not considered as an investment.

As for equity-based crowdfunding, investors can chip in for the projects in exchange for the equity of the firm. The more prominent equity-based crowdfunding platforms are Seedr and CrowdFunder. Locally, Fundnel also offers various funding methods for businesses and investors depending on their suitability.

Based on 2014 statistics, Asia is recording exponential growth in crowdfunding market, contributing 21% to the global funding volume. Globally, an estimated US$87,000 is raised every hour.

2. Peer-To-Peer (P2P) Lending 

P2P lending refers to a debt financing method which enables individuals to borrow or lend, without the traditional brick and mortar financial intermediaries. Investors can lend money to the businesses in exchange for periodic interest payment and the principal amount upon maturity. It is also known as social lending. Without the traditional financial intermediaries such as banks and finance companies, P2P lending narrows the interest spread between lenders and the borrowers which is beneficial to both parties.

P2P lending is usually deemed as risker as investors are lending their money to businesses that banks might have rejected their loans. However, there are many reasons why banks can reject a loan. And one of the main reason is that these SMEs do not have enough history of track records in earning ability or cash flows.

P2P lending platforms can help to assure the investors by doing first-round screening of the SMEs before posting them online. Financial information are also provided for the investors to do due diligence.

MoolahSenseFunding Societies and Capital Match are some of the P2P lending platforms in Singapore.

3. Bitcoin

Bitcoin is a digital currency (also known as crypto-currency) created in 2009 with the promise of lower transaction fee than traditional online payment methods. It is the most accepted digital currency and some businesses accept Bitcoin as a mode of payment for goods or services. Besides acting as a mode of payment, Bitcoin is also seen as a type investment for many people. However, price of Bitcoin can be very volatile. The highest recorded price was US$1,151 per Bitcoin in 2013 while the lowest was US$205 in 2015. As at 15 Feb 2015, price of 1 Bitcoin is at US$404.

To find out moreBitcoins Investopedia 

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4. Direct Purchase Insurance (DPI)

DPI enable consumers to buy basic life insurance policies directly from the insurance companies online, without having to go through financial advisors and hence, bypass commission charges. This initiative implemented by Monetary Authority of Singapore (MAS) to allow Singaporeans to have access to basic protection without any financial advice. Consumers can compare financial products offered by different insurance companies using online platforms like CompareFirst and take their time to decide which policy best suits them.

This initiative, together with vast availability of information online, people can make more informed choice and hence reduces the conflict of interest for insurance agents. The current commission based system might prevent some of the agents from recommend the soundest advice for their clients.

Read Also: Will Buying Life Insurance Online Be The Next Big Thing?

5. Ecommerce

Everyone loves Ecommerce. Yes, everyone, even the Durian sellers.

People love to buy things online for many reasons. It can be due to convenience, price competitiveness, price comparison or variety. The trend of buying things online is set to grow further and hence, listed ecommerce companies presents an unprecedented investment opportunities for the investors. The ecommerce sector is undergoing explosive growth, attracting US$112 billion worth of investments globally in 2014.

With increased connectivity and the advancement of technology, it spurs a new wave of innovation and the birth of new subsectors. This also presents more investment options hence moving investors away from the more traditional investment methods. It is worth looking more in-depth in digital sector than ever before.

To find out more about the digital sector, visit sgx.com/digitalsector

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

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The Fintech Revolution In Singapore: Here’s Why It’s Here To Stay

It’s undeniable that technology will increasingly impact the way we live, work, communicate and entertain ourselves. From the moment we wake up, we are logged on to technology.

We check our phones to reply any messages we’ve received. We use Grab to book a ride to work or check the arrival timings on buses. We also reply emails or catch up on news stories and social media gossips on the way to work.

Throughout the day, we use Google to search for information, Facebook to look into what our friends and family are doing, browse Agoda, Expedia, TripAdvisor and Airbnb, to look into our holiday plans. Other aspects of our lives including dating, either using Tinder or stalking dates on social media, travelling, using Google Maps, playing games on our phones, shopping on Zalora and Alibaba or RedMart and Amazon, and also to watch our favourite TV shows on Netflix if we are willing to pay, or to stream from illegal websites if we are not.

Having infiltrated most aspects of our lives, it’s not difficult to fathom that our phones will not only be our source of entertainment, our shopping mall, our travel agent and our personal assistant, it will also be our bank.

The Fintech Revolution In Singapore

As a nimble, technologically advanced country with an educated population, Singapore is well-placed to be a laboratory for technological solutions and innovations, including in the Fintech space.

Testament to the importance placed on fintech in Singapore, several schools themselves have started to include fintech modules into their courses. This will supply a talented pipeline of workers to the sector as schools continue to broaden their programmes to include fintech.

At the tail-end of 2016, Singapore hosted its first Singapore Fintech Festival. Just to get an idea of the scale of this, there were more than 11,000 attendees from more than 50 countries over the five day festival.

The country has also showed its intention to continue being at the forefront of fintech by committing to an investment of over $225 million over the next five years in 2015. Besides funds, implementing a collaborative system and vibrant fintech infrastructure is another initiative the Singapore government is taking seriously to grow the industry.

For the longer-term, the government seems set to playing its part to drive the industry. The MAS (Monetary Authority of Singapore) has confirmed that it will host the Singapore Fintech Festival again this year. Moreover, it will also be awarding up to $1.15 million at the Fintech Awards.

Read Also: 4 Jobs In Finance That Technology Will Be Disrupting

Despite these efforts, there are some reports stating that fintech penetration in Singapore is not the pretty picture everyone is painting it. Ernst & Young’s EY FinTech Adoption Index 2017 placed fintech adoption in our island nation at 23%. This is behind the likes of Switzerland, Hong Kong and Mexico, and way behind even developing nations such as China, India and Brazil.

The reason for this may be that penetration is easier for developing countries whose regulations are more relax. Whereas in Singapore, there are strict laws in place, which includes protecting copyrights and intellectual properties.

There are also developed countries that place ahead of Singapore, and this is an area that should be improved. One reason it may have happened is due to the strong companies that dominate the local financial marketplace, especially in the banking and insurance sectors. These companies that dominate the local markets are also highly profitable, which makes it less likely they would change the status quo without being encouraged to do by regulation.

How some of these walls can be broken is by good regulation and working with industry players to seek win-win solutions. This can be seen in MAS’ recent establishment of a Payment Council, that includes 20 leaders of such institutions in Singapore. The country has a great number and penetration of e-payment systems – but these are not interconnected which makes it a hassle for consumers even though easy solutions could be at hand to link them to one another.

Fintech Companies Are Also Doing Their Part

Companies and individuals in the country are also doing their part to upkeep a vibrant fintech arena.

Block 71 at Ayer Rajah, proclaimed as the world’s most tightly packed entrepreneurial eco-system with close to 750 start-ups, has been producing many technological companies, several in the fintech space, which are ready to make their mark in Singapore and beyond.

At the same time, Lattice80, a co-working space, was launched in the heart of our Central Business District during the fintech festival. Claiming to be the world’s largest fintech hub, Lattice80 says it prides itself on creating an eco-system for fintech start-ups to collaborate, connect and co-create.

Events like ShareInvestor’s InvestFair has also started to adopt a fintech spin to put forward a relevant event for audiences. DollarsAndSense was invited to be the moderator of two panel discussions this year, and we gained good insights into what the industry was doing.

How You Can Benefit From The Fintech Wave

In the insurance space, there are more and more companies trying to sell insurance online. This means consumers get more information and may pay less in commissions to insurance agents if they’re savvy enough to buy the insurance products they need.

Some new insurance companies are also trying to be the Agoda of insurance, where they list products and help you compare and rate insurance policies, letting you make a more informed decision. One such company you can buy travel, car, home, pet or maid insurance from is Insurance Market, which does not have a single agent selling products for the company – everything is done online.

Within the payments space, e-wallets and mobile applications such as DBS’ Pay Lah!, OCBC’s Pay Anyone as well as a peer-to-peer payments system Pay Now that allows consumers to transfer money to anyone. Mobile payment solutions have also been accelerated by Samsung Pay, Apple Pay, Google Wallet, PayPal and even cryptocurrencies such as bitcoin playing their part ensure consumers have the most convenient solutions to make their payment. This space is one of the most vibrant with many players in the market.

The lending space is predominantly catered to companies that require financing. Some of these companies may not be able to receive it because they haven’t built enough traction to get a bank loan or in other occasions they only require it for a very short term. Based in Singapore, Funding Societies, the only Southeast Asian digital lender to ranked in Fintech 250, a global list by CB Insights of the top 250 fintech companies in the world.

Also Read: One FinTech Company Hopes To Help SMEs Solve Cash Flow Challenges That Even Banks Have Problems With

Funding Societies provides P2P lending to SMEs in Singapore, Malaysia and Indonesia. Even though they lend money out to riskier borrowers to earn a higher rate of return, they have a robust system in place to ensure credit risk is minimised. Investors like us can earn higher returns by putting our money with them. To-date, Funding Societies has made over 750 loans and have a repayment rate of 96.1%.

Investing is another sector that investors can greatly benefit from. Traditionally, we used to use brokers and this gradually moved to many people investing through online portals. The next wave is to leverage on robo-advisors to invest your money for you.

Companies like iFast has its My Assisted Portfolio Solution (MAPS) that frees you from the challenge of building a robust investment portfolio and then having to constantly monitor and rebalance it. And because this is done through algorithm-based investing, transaction and management fees are brought down too.

Read Also: FSMOne: How Singapore Investors Can Now Trade SGX Stocks With The Same Platform They Use For Bonds & Unit Trusts

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

Is Your P2P Platform’s Interests Aligned With Yours?

Peer-to-Peer (P2P) lending platforms earn fees from matching borrowers with investors, but investors bear the full risk if loans default. Thus, it is important for investors to pay attention to the risks associated with the ‘originate and distribute’ model and look for lending platforms whose interests are aligned with investors.

Watch this video to find out how to check if the interests of platforms are aligned with investors:

Read also: 5 Things That You Can Learn From How Temasek Holdings Invests And Builds Its Portfolio

Find out more about the peer-to-peer loan at Funding Societies here.

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

What Is P2P Lending And How It Actually Works

The Peer-to-Peer (P2P) lending sector has gained quite a fair bit of attention as financial services have taken greater heights in its innovation phase in Singapore.

Read also: 3 Reasons Why Peer-To-Peer Lending Should Be In Your Portfolio

Whether you are an interested lender or borrower, it is important to note the pros and cons of P2P lending. Watch this video to find out more about P2P lending and how it actually works before considering it as part of your investment portfolio:

Read also: Three Key Risks Of Peer-To-Peer Lending

Find out more about the peer-to-peer loan at Funding Societies here.

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

This New App Can Help You Kick Start Your Investment Journey

Peer-to-Peer (P2P) lending is growing part of investment portfolios in Singapore. This growing adoption is helped by FinTech companies like Funding Societies, which has a powerful yet easy-to-use platform that helps connect SMEs borrowers to a pool of willing lenders who lend them money in return for higher interest rates.

Read Also: 3 Reasons Why Peer-To-Peer Lending Should Be In Your Portfolio

For those new to P2P lending, check out this handy infographic:

Read Also: Three Key Risks of Peer-to-Peer Lending

As Singapore’s leading digital lending platform, Funding Societies provides P2P lending to SMEs in Singapore through an online marketplace, while giving individual investors the opportunity to lend your money for much higher returns.

In keeping with their goal to make investing easier and more accessible, Funding Societies has launched a mobile app so anyone can add P2P lending to their investment portfolio.

Through this app, you can check on upcoming investment opportunities as well as monitor the status of your portfolio wherever you are. If you’re not already a user of the Funding Societies platform, you can sign up and start investing from within the app.

The Funding Societies app is available on both iOS and Android devices. Do check it out and let us know what you think!

Funding Societies is a DollarsAndSense Brand Connect partner. If you are interested to know them better, you can find out more on what they do on our DollarsAndSense Brand Connect Page.

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One FinTech Company Hopes To Help SMEs Solve Cash Flow Challenges That Even Banks Have Problems With

SME and start-ups owners will be familiar with the challenge. Your business is doing perfectly fine but you need a short-term loan or a credit facility to tide over some cashflow matters.

You turn to your regular banks but are not familiar with the loans they are offering. They are covenants you need to adhere to, collaterals you need to put up for them, an existing credit history and other business documents that you may or may not have.

It’s a hassle and you only have two choice. Comply or walk away.

Funding Societies Bolt To Provide Fast And Secure Loans For SMEs

Local FinTech Company Funding Societies aims to solve this common headache of SME owners and fellow entrepreneurs by launching an app that allow users to apply for loans in just 2 minutes, through their mobile phone.

The app, called FS Bolt, is now available on both iOS and Android devices.

FS Bolt uses an automated credit assessment process that enables it to approve or reject loan application in just two hours. Once a loan has been approved, money will be disbursed within 24 hours of the loan application. This makes FS Bolt one of, if not, the quickest source of working capital loans that SMEs can tap upon in Singapore.

Read Also: 8 Things To Ask Yourself Before Applying For A Business Loan

Keeping It Flexible For Singapore’s SMEs

To keep it simple and flexible for SMEs, FS Bolt also provides loan tenor flexibility. Borrowers can repay their loan anytime they wish without incurring penalty for early repayment. This is a feature that many loan products in the market do not have. Such a feature provides incentives for borrowers to repay their loans quickly, with borrowers only paying the interest during the time the money was borrowed.

Different Products For Different Needs

Funding Societies is of course no stranger to supporting SMEs in Singapore. The company’s flagship product is its peer-to-peer (P2P) lending platform that helps connect SMEs borrowers to a pool of willing lenders who lend them money in return for higher interest rates.

The company has a rigorous credit assessment process and also practices what it calls “skin in the game” by having its founders and team investing alongside lenders in every crowdfunding opportunity.

Read Also: Three Key Risks Of Peer-To-Peer Lending

The future of peer-to-peer lending in Asia

This article was first published by GTnews

The financial services industry has taken huge strides in the last 20-odd years, with path-breaking innovations in the financial system such as the advent of automated teller machines (ATMs), credit cards, online banking, mobile banking and sophisticated loan and deposit products. The speed of innovation has been unprecedented.

One new offering that has developed more recently is peer-to-peer (P2P) lending, also known as marketplace lending or crowdfunding. The concept seeks to leverage on the existing gaps in the lending system and serve the underbanked borrower segment while at the same time providing excellent returns to the lenders, who are usually retail investors with excess cash.

Since P2P lending is primarily an online proposition, the inherent costs and overheads are low. P2B (peer-to-business) lending seeks to use this concept to fund businesses which don’t have access to bank funding. Personal loans and loans to small businesses are the two most common lending products within the P2P framework.

The roots of P2P lending lie in the UK and US and go back to 2005-06, with lenders such as Zopa (the first P2P lender), Prosper, Lending Club and Ondeck being the pioneers. Thereafter came other big players like Funding Circle (UK) and Society One (Australia). Over the years, however, Asia has overtaken the US, primarily led by China. In 2015, P2P lenders globally originated loans worth US$64bn, with China contributing more than half of the total. Major lenders in Asia include:

China – Lufax, Dianrong, Yirendai
India – Faircent, Lenden Club, i2ifunding
Southeast Asia – Funding Societies, Modalku
Hong Kong – WeLab
Japan – Maneo

Unlike in the US and UK as well as some other developed markets, where P2P is predominantly an online model, a majority of the P2P lenders in Asia have a mix of online and offline models. Lack of data availability, low internet penetration, manual processes and regulatory challenges in emerging Asian economies are some of the challenges that inhibit growth of completely automated online models.

In the last few years, a new set of completely online P2P lenders has emerged. They use behavioural data from social media, acquire data through partnerships, and also use innovative technology-based credit scoring methods for giving out faster and lower-cost loans to underserved segments. One such example is Paipaidai in China which uses the online trading history of the borrower to underwrite loans.

Another recent phenomenon is the advent of cross-border P2P lending. Crowdcredit funds borrowers in emerging markets including Europe and Latin America through retail investors based in Japan.

The P2P segment has also attracted a significant amount of venture capital (VC) activity in recent times, as well as other funding, with some of the most notable funding for P2P lending companies in the Asian context including:

Lufax: Raised about US$19bn in their Series B round

Dianrong: Raised about US$1bn in their Series C round

WeLab: Raised U$160m in their Series B round

Funding Societies: Raised about US$7m in their Series A round

The key growth drivers for P2P lending in Asia include:

  • Rapidly-developing and high-growth Asian economies with large but credit-worthy underbanked populations
  • Huge funding gaps where banks are not able to lend due to structural inefficiencies
  • The availability of a large pool of retail investors with excess cash
  • Increasing internet and mobile phone penetration that complements the online product proposition and reach
  • Fintech-led fast online processes that help reduce costs and overheads while aiding customer adoption
  • Support from regulators and government bodies towards inclusive financial growth
  • According to Statista, P2P lending globally is expected to cross US$1 trillion in loan origination by 2050. Asia, given its unique positioning, should account for a significant portion of that total.

Three Key Risks of Peer-to-Peer Lending

The Peer-to-Peer (P2P) lending sector has gained quite a fair bit of attention as financial services have taken greater heights in its innovation phase in Singapore. The P2P platforms, gaining most of the limelight, are Funding Societies, CapitalMatch and MoolahSense as they have collectively raised more than $10 million in 2015.

The returns provided by P2P outshine general investments and depository instruments such as index investing and fixed deposits.

However, what are the key risks involved in P2P lending and what proportion of our investment assets should consist of such instruments?

3 Key Risks In P2P Lending

#1 Risk of Default

P2P platforms link people with excess money (investors) to businesses that requires extra money in order to grow (borrowers). By doing so, investors would receive return, in the form of interest payments.

In simple terms, we should think of it as us lending money to a friend in need. It would be possible that this friend of ours will make timely repayments back to us, or that the person may not be able to repay the money they borrowed.

P2P lending is done in a more professional manner with contracts drafted, signed and with limiting factors included in the agreement. Nonetheless, the fundamentals are similar.

Although the rate of default is currently quite low, with only a few bad P2P loans at risk of defaulting , we should be more vigilant because this is a new financial space just blossomed in the last 1-2 years.

How we should assess the risk of default on the broader perspective, without dwelling into professional jargons, is to assume that all of these loans would have risk levels above the types of business loans done in Singapore.

The reason is simple, if banks in Singapore are not willing to lend to these businesses, it is largely due to (a) lack of historical information – business only operating for <1 year, (b) businesses that banks are unfamiliar with, (c) high risk businesses – trading firms, (d) businesses that are deemed non-viable and (e) businesses marginally failed to meet the extremely strict criteria set by our banks.

If we are able to stomach such risk, then we should we consider investing into P2P loans.

 

#2 P2P Platform Operation Standards and Vision

What we mostly read about P2P and its risk is largely associated with the risk of default by the businesses that we are investing (through lending).

What is equally important is the P2P platform, which plays the most important role in managing the risk of default since they are the ones assessing the businesses and deciding whether or not these businesses should be put through to their platform for funding.

We have to understand two key things (a) how the P2P platforms assess the businesses and (b) long term vision of the P2P platforms.

As for (a), understanding the P2P platforms’ methodology in assessing businesses is important because we want to understand how the P2P platform is looking at the business before deciding whether or not to provide the loan. Furthermore, it allows market participants to feedback so that they can improve as well.

For (b), the long-term vision of a P2P platform is also important information. Like all businesses, if a P2P platform intends to stay in the industry and be a market leader, they have to ensure that they are always competitive and are the best at what they do. The simplest way of being the market leader and excelling in this business is to reduce default rates to as near 0% as possible.

 

#3 Lack of Transparency

If there is one thing that keeps us up at night when it comes to P2P lending, it is the lack of transparency in the underlying businesses where the loan originates as well as the methodology in assessing businesses.

 

Lack of transparency in underlying business

When some P2P platform raises money for the businesses, they would put only the industry of which the business (e.g. wholesaler, design and build, etc.) is in. The name of the business is not provided.

For investors who invest a larger amount, it would make sense for them to do some background check to get a sense of the viability. However, without the sufficient disclosure, it would be impossible to do so.

Some P2P platforms do disclose the names of the businesses they lend to, but we believe this should be the norm, rather than the exception.

Lack of transparency in methodology

We do not doubt the ability of P2P platforms to assess the businesses via their methodology. That is because they have incentive to ensure that their methodoloy is as foolproof as possible. However, without any “request for comment” from professionals in the industry, it’s hard for the market to know how these methodology works. It also means that investors have to place 100% trust in the platform.

 

What is the proportion of assets that should be allocated to such instruments?

The 3 key risks mentioned should not turn you away from investing as the returns provided are significant, ranging from as low as 10% to over 20% per annum.

As mentioned, if we are able to stomach the risks, P2P lending is a great way to diversify our investment portfolio.

Nonetheless, we would not advocate allocating a large percentage of your total investment assets into P2P just yet. At least not until the P2P platforms start to reduce the lack of transparency issues mentioned above.