Also, each of the platforms operates on a slightly different principle, with its own legal documentation, usage functions, reporting and ethical standards. To help you navigate this jungle, below are some experience-based tips for choosing which crowdfunding platform to invest in.
Experience of Platform Managers
The platform can call itself fintech or tell how artificial intelligence helps in decision-making. However, at the end of the day, lending is a very old and conservative business - an experienced and cautious businessman is successful in it. Therefore, the first step in choosing a platform is to evaluate its founders. Check that they include someone with significant credit experience, while the founders have an impeccable historical reputation (searching Google and business register data). Since the operation of the platforms is regulated by the state, it is important to make sure that the platform has received the necessary permission - this can be checked on the website of the authority that issued it, which is the central bank or financial supervisor of the country the platform is registered in.Common interests or conflicts of interest
For the most part, platforms act as bulletin boards from a legal point of view, leaving all the risk and responsibility for making an investment decision on the shoulders of investors. The platform's basic income is made up of the commission from the loan issuance, which it withholds from the loan recipient. As a result, platforms earn depending on the amount of financed loans, not their quality, creating different motivations with investors. In order to unite the interests of the platform and its investors, some of the platforms, including Capitalia, co-invest their own funds in each financed loan.Another aspect that is important to pay attention to is whether the platform finances or sells loans issued by affiliates. If there will be problems with the repayment of the financed loan or the loan buyback request, what side will the platform take in such a case? Will it really monitor the loans that the platform owners or related parties receive as strictly? Several brokerage platforms only sell financing issued by their affiliates. In such situations, the investor should be aware that in case of problems, the platform will most likely represent the interests of its affiliated company rather than the investors. This is not a disqualifying circumstance for investment, but certainly food for thought.
Statistics presented by the platforms
Platforms much prefer to show the average interest rate of financed loans, the total amount of interest paid or the amount of historically issued financing, which is not exactly the main indicator that an investor would like to see. What matters most to an investor is the historical return, which takes into account provisions for bad loans and credit losses (net return). At the European level, uniform regulation of platforms helps that platforms are obliged to calculate returns and credit losses in the same way - which has been a significant obstacle to comparing different platforms until now. Track the platform's historical returns, bad credit and savings in separate statistics sections. Unfortunately, we must admit that much of the data presented is still difficult to interpret or compare with other platforms. A good standard for the calculation of historical yield is presented, for example, by Mintos.Diversification opportunities
Despite the best intentions of the platform managers and the most careful project analysis, loans are a statistical business - some part of the loans will definitely not be able to repay on time or will stop paying completely. It is important that in such a situation one or a couple of bad loans do not have a significant impact on the return of the investor's portfolio. Therefore, investment diversification is important, which means that you should have at least 20-25 loans of a similar amount in your portfolio. In the case of loan companies, it would also be important to diversify the portfolio with companies from different industries. This, for example, is the advantage of the Capitalia platform, because investors can invest in it in the field of production, trade, agriculture or real estate. On the other hand, for example, the activity profile of Estateguru or Mintos is only related to the financing of companies of one sector.Diversification is easier to implement in crowdfunding platforms, while more difficult in broker-type platforms. In broker platforms, it is important to remember that diversification occurs only when loans are purchased from different credit issuers. For example, if the brokerage platform trades only loans issued by related company/s, then even if you buy 20 different loans even in different countries, your risk diversification will be very poor - your investment depends entirely on the ability of one financial company to fulfill its obligations.
Automatic investments
Almost all platforms offer tools to create and maintain a portfolio automatically. Almost all investors should use it as well. This not only saves time that should be spent investing or buying individual loans, but also provides the all-important diversification. If a platform does not have an automatic investment function, it is a significant disadvantage.Investing by choosing individual loans on platforms is only worthwhile if you are able to understand and evaluate the financial data of companies. The need to analyze financial data becomes obvious in a situation where companies are funded through a crowdfunding platform. But remember, if you plan to finance consumer loans with a buy-back guarantee on brokerage platforms, you should carefully analyze who offers this buy-back guarantee. That is, how strong is the balance sheet and financial indicators of this guarantor, so that the repurchase guarantee can be fulfilled if necessary.
Other functions
Among other important features that are important when comparing platforms, the existence of a secondary market can be highlighted. The secondary market means that you can sell the loan you own to another investor and, accordingly, if necessary, get your money back sooner than the particular loan's maturity date. Other important features to pay attention to are the preparation of tax and return reports, the ease of use of the platform and the responsiveness or availability of customer service.List of lending platforms
For your convenience, we have collected the platforms we know, as well as their type and specialization:Carefully selected lending platforms are a great new addition to any investor's investment portfolio. Although this industry in its beginnings was suitable only for the most hardened and risk-tolerant investors due to the many risks, now clear and uniform national regulation has sifted out the most successful platform companies, making this investment class much more accessible to a wide range of investors.