When considering Direct Lending or peer-to-peer lending (P2P lending) as an option for your money, choosing the right lending platform is one of the most important decisions you will make. Investors often consider P2P because of its ‘supposed’ simplicity and attractive rates; however, complexity can arise selecting a platform.
Any investment involves a level of risk and Direct Lending and peer to peer lending are no exception. When considering where to invest money, understanding any potential pitfalls will help you make informed decisions and mitigate some of the more avoidable risks . Choosing the right lending platform - one aligned with your own interests - is one of the key ways to avoid exposing your money to ‘unnecessary’ risk.
Five things to consider when choosing a lending platform
Invest sufficient time to fully research your options before you commit any capital. To help you get started our investment team have put together their five suggestions of what you may wish to consider before choosing a lending platform.
1. The background and experience of the lending team. How much credit and investment experience does the platform’s investment team have? A team with a strong financial background will be better placed to make sensible and informed decisions when originating and managing loans. They should also be able to better identify loans to avoid.
2. The transparency of the platform, and its overall track record. How easily can you find information about the platform’s investment performance? Although past performance is not a prediction of future results, it is one element in considering where to invest.
3. Due diligence checks including:
- Assessing a platform’s ‘typical’ borrower. Who are you lending to. Are borrowers primarily individual consumers or businesses? Does the platform have a good balance of ‘borrower types’?
- The underwriting process. Does the platform publish its underwriting criteria and who signs off the lending decision?
- How security is valued. Is there a focus on asset-backed lending? For example, what proportion of loans have been secured against a property or a business?
- Default and recovery process. Is the platform clear about what happens should a loan go bad and does it have a recovery process in place?
- Does the platform invest along-side each loan opportunity? This can be a useful indicator as to how aligned the platform is with the interests of its customers, but again other factors can come into play.
4. What are customers saying? Many platforms have an independent customer review partner in place such as Feefo or Trustpilot. Take a look at both the reviews from customers and any responses submitted by the platforms.
5. Speak to directly to the platform. In the age of all things digital, it can be a good idea to speak to a real person. Face-to-face may not be practical but if you have any queries or concerns then a call can help you get a feel for the people behind the platform.
What about FCA authorisation?
FCA approval should provide some comfort but it is important to bear in mind that it does not guarantee the quality of a platforms’ loan or returns. Don’t assume that because a lending platform carries an FCA logo that your money is safe. Research your platforms thoroughly and consider the five points we’ve outlined above; regardless of whether the lending platform has FCA approval or not.
Time consuming but important
There are many lending platforms in the Direct Lending market of varying quality, so although researching platforms can be time consuming, in the long run it is well worth the effort.
“Choosing the right platform at the outset, and monitoring on-going performance are key when deciding who to trust with your money in this market.” Graham Martin, Chief Investment Officer, BondMason
If you are pressed for time, then there are direct lending and peer to peer lending ‘fund and forget’ specialists available who run due diligence on potential lending partners, carefully select the loans and diversify your capital for you.
In summary, not all platforms are created equal; compare offerings across different platforms and choose the platform most closely aligned to your risk appetite.
*Warning: nothing in this article should be construed as advice. Your capital is at risk.
BondMason, the UK’s leading Direct Lending specialist, makes it easy for investors to target gross returns of 8%+ p.a. by enabling clients to invest in Direct Lending the smart way. Our Senior Investment Team has a wealth of relevant experience – each with over 15 years’ investment experience in financial institutions; including Fidelity, Blackstone, Ares, Lloyds, Babson and JP Morgan.
Through hours of in-depth research, face-to-face meetings, and a robust due diligence process, our experienced investment team only approves a select number of lending partners and P2P platforms to work with. In fact, although we’ve reviewed over 100 potential lending partners, we have only approved 26 to-date.
Download your free guide
To find out more about how to make informed decisions about your lending portfolio, download your free copy of Steps to Successful Investing in Direct Lending.