Crowdfunding/P2P lending risks: CoAssets case study

Tech in Asia reported today that CoAssets retail investors have lost millions of dollars to the peer-to-peer lending platform, with police reports being filed.

Seedly has published a summary of the issues and basically the gist is that the company has allegedly winded up and transferred about US$30 million of its debt to a Hong Kong-based company and could not collect back its money.

CoAssets is a microlending/crowdfunding platform where investors pool funds together and lend these funds to SMEs. Minimum investments on the platform range from S$1,000 to S$5,000.

The investment opportunity set on CoAssets can range from working capital loans to invoice financing and bridging capital, similar to many other crowdfunding/peer-to-peer lending platforms like Minterest and Funding Societies.

In return for lending money to these higher risk companies – which might not qualify for bank loans due to their lack of creditworthiness – they earn a high yield ranging from 10% to 20% on their investments.

How peer-to-peer lending works?
How P2P lending works. Source: Seedly

Loans have varied types with different degrees of risk, e.g. secured (with collateral) and unsecured borrowing (no collateral but higher interest rates). Banks have careful safeguards and risk management systems to ensure that their lending business is profitable.

If you read the Seedly summary, you’ll find out that CoAssets issued unsecured Promissory Notes (PNs) to investors as IOUs and many investors had claimed that they have not been repaid their interest or princpal upon maturity. This is something known as a loan default.

In fact, this situation is not uncommon. Mr and Mrs Budget blogged previously about how they and many others lost money when investing in companies that tried raising funds through another crowdfunding platform Funding Societies.

The rising default rates in many companies could be a result of COVID-19 putting extreme financial pressure on their operations.

The risks of P2P lending are not worth it for most investors

P2P lending to SMEs are a high-risk endeavor that usually do not pay off well. There is a reason why banks avoid them – they are too risky for their books.

The headline interest rates tend to be attractive on first glance, and most investors tend to diversify their investments in P2P lending by spreading their loans into smaller but more companies in an attempt to spread their risks.

As a lender who is lending money unsecured, the risks are high. Imagine lending money to a stranger you don’t know without any pledge for several months or years!

There is a huge liquidity risk (since your money is locked), credit risk (for lending to the borrower whose credit worthiness is rejected by the bank) and third party platform risk, which if the platform administrating your investments close, you might not be able to recover your capital.

Avoid them and you can save yourself the trouble of debt collection and legal proceedings if things go south.

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