The Advantages of Investing in Business Loans on P2P Lending Platforms
Last Update: Fri, Aug 11 2023
I've been investing myself on P2P lending platforms for over a decade now, and more recently I've been shifting my interest more and more on investing in business loans on those platforms, rather than in consumer loans. Is that a good idea? What are the advantages of business loans? And how to actually get started? That's what we will see inside this article.
What is Peer-to-Peer Lending?
Peer-to-peer (P2P) lending, also known sometimes as crowdlending, is a way to invest money that allows individuals to lend money directly from each other through online platforms, bypassing traditional financial institutions like banks. P2P lending platforms provide an alternative to traditional lending models, where borrowers can often get lower interest rates, and lenders can earn higher returns on their investments.
Note that the loans themselves on those platforms can be consumer loans (to people directly, for example for buying a car) or business loans, which is what we will talk about more in details now.
Advantages of Business Loans on P2P Lending Platform
Let's now see what are the advantages of investing in business loans, rather than the usual consumer loans that you can find on most P2P lending platforms.
First, and that's I think the most important for any investor: investing in business loans comes with much less risk compared to investing in consumer. Indeed, there is much less risk than a business loan would go to default, as it's given to a company on which it is quite easy to a due diligence process. On the other hand, consumer loans have much higher risks of defaulting as it's given to individuals that can for example loose their jobs, or in general have their whole financial situation change much faster.
Also, it's nearly impossible to get more information about the person behind a consumer loan, because of privacy policies like GDPR or others, so you need to rely completely on the assessment made by the loan originators. In case of business loans, you have way more data that you can check yourself directly: annual financial reports, websites, official reports on government sites, etc. So in general, you will take much less risk by investing in business loans on P2P lending platforms.
Returns on business loans are also more predictable, given that companies are much transparent entities than individuals. There is more financial data available as well as financial reports, whereas the financial situation of an individual is in general simply declarative and more opaque. Therefore, business loans are in general more reliable and it's easier to get stable returns by investing in business loans.
In terms of returns for investors, whereas they are sometimes a little bit lower than for consumer loans, it's not unusual to find business loans with very solid, double digit annual returns for investors. Those slightly lower returns are due to the fact that their is also less risks involved, so in general business loans have an healthier risk/reward ratio, while still maintaining great returns for investors.
Finally, by investing in business loans you also may directly support local small and medium businesses - which is an additional benefit.
Introducing Debitum: the Best European Platform to Invest in Business Loans
Now, let's see how to actually take advantage of this and actually invest in business loans. Whereas there are many platforms that offer to investors the possibility to invest in business loans, there is one that actually specialises in this: Debitum.
Debitum is platform that I have in my own portfolio and that actually only offers business loans investments, so you will for sure get all the advantages that I mentioned above - with low risks and high yields (around 10% on average per year).
Their main offer is called ABS for Asset-Backed Securities, which are financial instruments that group together business loans - meaning you invest not only in one business loan but in set of loans (ABS finance instrument) that gives additional security (if one loan defaults in ABS, some other will cover loses and will balance stability and profitability on financial instrument). On top of that those instruments offers stable returns and the platform is fully regulated & monitored.
On top of that, they are a fully licensed platform, meaning that all the operations of the platform are monitored and regulated by the EU authorities. They actually have an investment brokerage license, and only a few platforms in Europe have this license, so this is definitely a great advantage for the platform and means your money will be safe. And thanks to that, your money is also guaranteed up to 20,000 Euros by the Investor compensation scheme.
Debitum also has a very strict due diligence process for all the loans that end up on the platform, with a 4-step risk evaluation process, done by their own experts as well as 3rd party professionals. This allows them to have 0 defaults since the company is in the market (for over 5 years now), which is quite impressive.
Finally, they are constantly adding new loan originators to add more diversity of loans to the platform, from countries like Estonia, Latvia, Poland and the United Kingdom. They increased their interests rates in early 2023 and also added a new loan originator from Poland (Flexidea Polska), that resulted in increased interests rates overall. In March the average interest rate on the platform was 10.5%, and it will continue to increase as they add new loan originators.
Should You Invest in Business Loans?
So at the end of the day, should you actually consider investing in business loans on P2P lending platforms? With only advantages over consumer loans, and high yields as well, it's clear that it is definitely a good idea to invest in business loans on P2P lending platforms.
And one great way to do that is to use the Debitum platform - they offer low risk, high yield investments in business loans, and on top of that they are fully regulated with an investment license and have a very strict due diligence process. I've been an investor myself on Debitum for many years and never had any issues with the platform, and got stable returns even in difficult years like during the COVID crisis.