Picking your peer-to-peer platform provider to invest
Disruption is not just happening to retail, hospitality and taxis. It’s also happening in financial services, especially banks, where borrowers and lenders are finding ways to engage, cutting traditional players out of the picture.
At best, in this scenario, both investors and borrowers can end up winning, with better lending rates and higher returns. This sector is worth investigating for investors comfortable with debt, but be prepared to do your homework.
The sector is expanding rapidly with a range of new businesses, offering differing features. But for most investors the field can be split into peer-to-peer lenders and corporate bonds.
Funds are available for personal commitments such as car and housing loans and refinancing existing debts as well as those seeking small business loans.
Borrowers and investors can trawl the online market place and find peer-to-peer lenders, negating the need to go to a bank. The company acts as an intermediary and brings both groups together in much the same way as a bank would, but its business is online, without the costs of physical branches and staff, enabling cheaper delivery.
Investors can decide how much they want to lend, the term, and in some cases be involved in assessing the lending risk. The company checks creditworthiness and administers repayments.
One of the largest companies in the market is SocietyOne. It offer consumer loans from $5000 up to $50,000 for up to five years with principal and interest repayments fortnightly or monthly. It also lends to the agricultural sector. SocietyOne does not pool loans like some industry rivals; rather investors can select individual loans in which to invest. In operation since 2012, the company (which is part-owned by News Corp, owner of The Australian) has orchestrated $300 million worth of loans. Comparison loan rates at SocietyOne compared to the major banks (as at July this year) were showing SocietyOne at 9.92 per cent against 14-18 per cent at the nation’s biggest lenders.
At RateSetter, supply and demand for products determine the rates of return. Minimum investment is just $10, for terms of 1 month out to five years. As at August 31, current indicative rates of return ranged from 3.9 per cent for one month out to 8.9 per cent for five years net of fees. RateSetter has an attractive “provision fund”, where part of the charges to borrowers are set aside to compensate lenders in the event of a default. Although it doesn’t provide a guarantee, and it is not insurance, the collective value provides some comfort to lenders.
The website details the value of outstanding loans at about $97m, money in the provision fund of $5.5m current estimates of bad debts of $3.2m, with coverage against bad debts of 172 per cent.
Bigstone targets small businesses and offers funding up to $250,000 for up to 24 months. The company makes the loan based on financials and credit performance of the company and its directors. Revenue must be at least $10,000 per month. Returns range from 7 per cent to 23 per cent and the company advertises low fees of 1 per cent, and only collected when the funds are paid to investors.
ThinCats Australia deals in secured business loans for Australian companies. Lenders bid for amounts for fixed rate loans, with a minimum bid of $1000, the maximum being the value of the loan. Investors can make multiple bids with at different rates and amounts, and more than one bid can be accepted, providing multiple loans at different rates of return. To invest via ThinCats you must be a sophisticated investor.
One point to note, in many cases investors commit for the term of the loan. If liquidity is important to you, these investments may not be suitable, or you need to invest in the shortest dated loans.
The top end of town
While peer-to-peer lenders get a lot of the media attention, investors in corporate bonds have been providing a similar service for many years … that is, they have been lending directly to companies. Banks have provided much of the debt to mid-sized companies, but new avenues are opening.
Larger companies are adding other sources of funding by issuing corporate bonds. There have been fewer, larger deals worth $30m-$300m, offering investors 6-10 per cent per annum returns.
The bonds can be secured or unsecured, fixed or floating rate and importantly, are tradeable.
If you are interested in learning more, a great place to start is the ASIC MoneySmart website at www.moneysmart.gov.au which covers peer to peer lending and corporate bonds as well as other investments.