There are a number of platform operators offering alternative finance investments. It can be hard to compare the different platforms, find out what separates them and what will best meet an investor’s objectives.
The main areas to consider when looking at the different platforms are:
There are a number of different models for how the loans an investor invests in are selected. These include:
- Auto investing where the platform operator invests the funds at its discretion
- Auto bid where the investor sets the rates it is willing to invest at and the operator then invests the funds
- Self-select where the investor selects which loans to invest in and then makes the investment
- Interest rate auction where the investor makes an interest bid in relation to a loan to a borrower that the investor will lend at
Sourcing and checking of borrowers
This is how the operators source the loans that they offer on their platforms and the level of checks that the operators make on the borrowers before the loans are put on the platform. It is important for investors, especially (but not solely) where they have no control over the end borrower, to know that the operator carries out due diligence on the borrower. This as a minimum should cover “know your customer” investigations and credit checks on individuals and/or companies.
Existence of provision fund or similar
This is where the platform operator takes on the first part of any losses by either establishing a provision or taking on part of the loan. Some platform operators set up a fund to be used to finance an element of any losses incurred by investors. Others take on part of each loan and then make this subordinate to the investors’ loans. Therefore the operators have an interest in the loan and will incur the first part of any loss on these loans.
What is important to consider is the size of any provision fund in relation to the total funds currently lent on the platform or amount of each loan the operator will take on.
Existence of secondary market
Where the loans are for terms of more than six months it is important for investors to know if there is the ability to come out of the loan early. Therefore the existence of a secondary market or matched bargain process run by the operator or other party is an important consideration.
Existence of charge over assets and maximum loan to value
The security of loans and the value of the assets which are secure are important. Therefore the existence of any charge or similar security over assets together with any restriction on the maximum loan to value are important factors to consider.