If you own a small, growing enterprise, getting funding from your peers through peer-to-peer (P2P) financing can be a great substitute to applying for bank funds. On the other hand, if you are an investor, P2P financing can be a great way to earn returns while helping SMEs. The system increases returns for the investor, and decreases restrictions for SMEs and issuers, by withdrawing traditional middlemen from the process.
It has heralded a new era of FinTech, where collaborative funding has helped small businesses in their growth and development. P2P financing platforms use big data and advanced analytics to bring together investors and SMEs.
While a lot of articles talk about the benefits of P2P financing for SMEs, there are also many advantages of being an investor. Read on to find out more:
1. Handsome return on investment
The returns in P2P financing depend entirely on the risk profile of various funds. The relation between risk and returns makes it easy for investors to choose where to put funds based on their risk appetite. Yet keeping all the factors in mind, a high return rate up to 14% annually (or 25% in effective rates) in today’s market is very attractive for any investor.
2. Spreading risk
With the rise of P2P financing, you get another opportunity to diversify your overall portfolio. Moreover, you can decrease risks by investing in funds that have a safer credit rating. You can also reap the benefits of diversification within the P2P financing model itself.
By financing 4 SMEs with RM 100 each, you can spread out the risk that your RM 400 fund will be defaulted on and protect your rate of returns.
3. Steady source of income
For SMEs, an efficient cash flow policy is a prerequisite for growth and development. For that, periodic cash or cash equivalent payments from P2P financing can help with the situation. SMEs will repay the funding from P2P financing in monthly instalments.
A great benefit of investing in P2P financing is that it allows you to get monthly repayments, which is not always the case with stocks and bonds that usually pay dividends and income every quarter. SMEs with surplus funds too, can become investors in P2P financing.
4. Easy to maximise returns on investment
To maximise the returns on your P2P investments, you can simply reinvest SME monthly repayments to more SME financing. Your money will work for you instead of the other way around – investing in P2P financing is an excellent source of passive income and your money compounds returns on a monthly basis.
For example, Investor A invests into a deal for 12 months with an interest rate of 14%. Without reinvesting, his nett return at the end of the deal with stay 14%, as there was no compounding effect.
Investor B, on the other hand, invests on the same deal but continuously reinvests his monthly returns into other SME funds. At the end of month 12, investor B’s nett returns would grow up to 25%.
5. Low homework requirement
While doing research and risk assessment for your investments is extremely important, the classification of funds according to the risk-return relation in P2P financing helps you get a broad picture of each fund’s risk profile without having to spend a lot of time and effort into it. The report prepared by P2P financing operators about the SME issuer’s health also helps you minimise your work.
6. Aiding in SME growth
The concept of P2P financing gained prominence with the rise of social funding, which helps individuals and businesses get funds from the general public. Issuers on P2P platforms are usually SMEs, who need funds to aid their development. By investing in them, you can help them expand, be a part of their success, and contribute to the local economy!
This article was contributed by Funding Societies, the first peer-to-peer (P2P) financing platform in Malaysia. We provide working capital financing for small and medium-sized enterprises (SMEs); we also offer investment opportunities with returns up to 14% per year. To learn more about us, click on our website here.
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