Interest in alternative finance platforms has been increasing steadily together with the number of platforms. Currently, there about 100 worth mentioning P2P and P2B platforms (Debitum Network included). The assets (loans) that the platforms offer for investors to invest in can be put into three main categories: consumer loans, real estate loans, and business loans. Most of the platforms specialize. About ⅓ of them focuses on consumer loans. We covered those while comparing consumer loans with business loans. ⅓ of the platforms focuses on business loans. And about ⅓ of platforms focus on real estate loans. The aim of this blog post is to compare business loans versus real estate loans within the context of alternative financing platforms.
Business loans are issued solely for businesses and for business purposes. They can be secured (company’s assets are pledged as collateral to be used in case of failure to repay the loan) or unsecured (no assets are pledged as collateral and the lender can only make a general claim for the assets of the borrowing company). Secured loans, naturally carry smaller risks and, consequently, have smaller interest rates.
Real estate loans are a type of investing that is backed by real estate (property both residential and commercial) or investing in loans given for projects related to real estate/rental. In the case of bad loans, a lender can make a claim for the assets that are pledged (real estate).
According to p2pmarketdata.com, there are 17 platforms focus solely on real estate (lending). Around the world, there would be more (around 30), but only 17 stand out. The three leading platforms in real estate lending are Sharestates, Octopus Choice, and Estateguru. Sharestates (in the US) has a 10.32% annualized return for investors. Octopus Choice (in the UK) currently has a target interest rate of 4%. Estateguru (in Europe) is the leader in terms of returns and has the historical average weighted returns of 12.12%.
The idea that real estate loans are backed by tangible assets (real estate itself) is enticing and provides confidence in this type of lending. However, the most recent reports about Lendy (once a leader in real estate loans, now has an outstanding loan portfolio of about 155 million GBP, of which about 90 million GBP are in default) as well as independent reviewers who diversify among various alternative finance platforms paints a different picture.
In the case of default, real estate that was pledged has to be sold to return investors’ money, plus interest. However, selling real estate that failed as a project may not be that easy, as who will pay the desired amount (to cover the debt to say nothing of outstanding interest). Most of the platforms do not have a buyback guarantee as the real estate serves as a guarantee to get back investors’ money in case of default. Investors can wait for months, possibly years (legal proceedings, sale of property takes a lot of time) to get their funds back. Taking what has been said into account, 8-12% (Lendy advertised gross annual return before tax up to 12%) annual interest advertised on most real estate lending platforms, may not be the real returns that an investor gets.
Some real estate lending platforms have a Reserve Fund (Provision Fund) which is meant to cover the losses for investors who end up holding bad loans. However, not all platforms have it and coming back to the example of Lendy, a conclusion can be made that if investors are exposed to a large number of poor quality loans, their funds can be lost entirely with little or no hope to get them back.
Investing in business loans is exposed to the same risks as investing in real estate loans. A business loan may default and if it does not have any safeguards as collateral or a buyback guarantee investors who put their funds into such a loan will lose their money. With the interest rates being very similar in real estate and business loans one might ask, why choose one type of investment over the other? If both can default, and both can return relatively the same returns, is any type of investment is better?
Inherently, one type of loans is not better than another one. Both real estate platforms (as in case of Lendy) or lenders that offer business loans (as in case of Eurocent bankruptcy) can go bankrupt. Quality loans, backed by a number of safety guards make the type of lending advantageous, whether it be real estate loans or business loans.
One of the best safety measures that help to protect investors’ funds is a buyback guarantee. A lot of platforms that offer business loans have implemented the guarantee for their loans. A buyback guarantee means that if the borrower is late with the repayment of the loan by a predefined amount of days (usually 30-90, the actual number depends on the platform and a loan originator that issues a loan) the broker (loan originator), who issued the loan will have to buy back the outstanding principal with the outstanding interest. The guarantee significantly reduces risks for investors. If the loans are high quality there would be very few defaults, and, consequently, the originator will be able to fulfill his obligation to buy back a few that underperform.
On the other hand, a buyback guarantee is as good as the broker who offers it. If the loan originator (broker) has a lot of bad loans in his loan portfolio, eventually, he will not be able to honor his promise to buy back all of them and will have to declare bankruptcy as we have seen in Eurocent case. Then, investors who put funds into the loans will lose not only the promised interest but also the principal (with very little hope to get the money back).
A buyback guarantee has served well users on Debitum Network platform. Within the period of 9 months since the launch there hasn’t been a single default on the platform. A few loans were bought back by the loan originators, and investors always got their principal, interest, as well as money earned on penalty rates (for late loans). This proves that quality business loans with a buyback guarantee are the ultimate choice for investors who search how to employ their capital on alternative finance platforms, whether it be real estate loans or business loans.
One of the main advantages of Debitum Network is attractive interest rates for assets in invoice financing with a buyback guarantee. They are among the highest in the industry. Real interest paid to investors who use our platform, currently stands at 9.75%. Thus, we have selected an asset for you from the platform, which you might consider adding to your portfolio for investment. The borrowing company specializes in the re-sell of authentic branded products for customers in over 100 different countries. It has over 50 employees and over 500,000 EUR in revenues. Check out the asset!
Disclaimer: Investments in financial products are subject to market risk and any investment should only be done with risk capital. The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.