Whilst crowdfunding platforms carry out their own due diligence procedures before allowing companies onto their platform, investors should be encouraged to manage their own risk.
The approach applied should be specific to the goals, sophistication and net worth of the individual investor.
Short Term vs Long Term
If planning to access funds in the near future (i.e. within one or two years), shorter term loans should be sought to avoid lock in. Additionally, the risk associated with longer term loans may be more volatile due to a changing business environment over time.
When investing over a longer period deploying money into P2P is likely to be riskier but can allow investors to benefit from a greater value of accrued interest over time. If such an approach is taken, the value and overall return of the portfolio should be reviewed on a semi-regular basis in order to make sure that goals are being reached and reviewed.
Consideration should be given to how quickly funds can be accessed, as this will allow for unintended circumstances.
Platforms with secondary markets make this process easier. The average time it takes to exit investments and overall charges are factors which should be paid attention to.
Some platforms require funds to be locked up for three to five years and may offer a higher return due to this more inflexible approach.
Investors should also conduct their own liquidity assessment of businesses by reviewing their financial statements.
A portfolio approach should be taken which suits the specific needs of the individual.
With P2P individuals are able to invest into SMEs, an asset class which retail investors have found hard to access until now.
The yield from P2P can be used in conjunction with more traditional investments.
Best practice portfolio approach requires diversifying investments across different asset classes, geographies and different industries.
The weighting of these investments, in terms of their risk factor, should be considered in the context of goals.
Investors should also diversify within P2P by investing in different products. This includes revenue loans (flexible due to repayments being based on gross revenues), and bonds. Investors may feel more comfortable with the bullet repayment on the latter type of loans, if they are security backed.
In order to benefit from the full potential of compounding interest, investors may choose to invest through platform which offers the IFISA. This will allow investments to grow tax free whilst they are inside this wrapper. Over time this can significantly increase returns.
Additionally, make sure to reinvest from amortised loans, in order to limit the possibility of funds sitting idle, and in order to make sure you are fully allocating the tax shelter from the IFISA.
Whilst it is possible that some businesses on platforms may default, make sure to take advantage of the full tax reliefs available to you by utilising the bad debt relief from these investments.
This guest blog was authored by Chris Hancock, CEO of Crowd2Fund.com, see https://www.crowd2fund.com/marketing/innovative-finance-isa-or-ifisa
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