As we all know, the alternative finance industry has been experiencing an amazing growth in recent years. But have you given it a thought as to why there is a sudden rise in the popularity of alternative finance industry?
Well the answer is pretty simple. The alternative finance firms not only help the multinational organisations in funding their growth strategies, but they also help small businesses and start-ups in sustaining their finances for stability.
Over years, the alternative finance firms have been providing loans to the UK SMEs at lower interest rates and have yet managed to maintain a strong position with healthy net returns. When the UK government saw the positive effects this new industry has got on the country’s economy, it decided to step in and increase awareness regarding this new source of securing funds.
Today, with the UK government alongside, the alternative finance industry is flourishing more than ever. More and more UK SMEs are option for this option over traditional banking institutions.
In the light of this, we are here to help improve the trust and understanding of this sector. Many retail investors are now looking forward to invest in alternative finance. However, there are few things that they need to take into consideration before doing so.
We have come up six things retail investors need to consider before investing in alternative finance. Following are six questions retail investors need to ask themselves before planning an investment in alternative finance.
1: Can I trust the platform?
Transparency is the key to gain trust. What retail investors can do is to check track records of each platform they have come across. If they observe any dips in performance, they can then question why and what was done to prevent it from happening in the future.
Figure out what comprises a loan default. There are various platforms that do not recognise late payments as defaults once they have been repaid. In fact, since the alternative finance industry is been put under huge regulatory speculation is only a good thing for investors. However, it is still your responsibility to conduct an informed research before making any decision.
2: Is the business model sustainable?
You need to make sure whether the business model is sustainable or not. Assure whether the platform is on the road to profitability and whether it has any financial backings to attain future growth.
Any business’s ability to achieve success is very straightforward, but is an essential consideration for any retail investor. Remember that the alternative finance industry has not entirely spread across the UK in the same way as other investment options. This makes it even more important for retail investors to have a complete understanding of their chosen platform.
3: Am I covered by the investor compensation scheme?
The regulators help rectify any structural weakness the sector has. Additionally, they willingly make sure that the underwriting, business model and capital adequacies are improved. However, the downfall here could be that the existing regulations are not yet substantive enough to address these issues.
The FSCS lately announced that they will readily help investors with £50000 if they received any unsuitable advice regarding investing in the sector. But this rule is yet to be issued legally.
4: Do I have a diversified portfolio?
Once you have narrowed your list down to the platforms you wish to invest in. You then have to look for any specific or potential risk that you may face. In other words, it means analysing a range of loans. Once this is done, you need to keep refreshing your portfolio continuously to maintain diversification.
5: Should I invest through a fund?
For the retail investors that do not want to spend valuable time managing their exposure to this asset class, there is a potential alternative that they may like. You can wrap your alternative finance assets in a closed end fund structure where the assets are managed and liquidity is provided through funds instead of the underlying assets.
When you invest in a fund, it helps you process the required due diligence on each platforms and loans for you. However, you need to spend time to choose your fund wisely.
6: Should I invest?
Although there are risks involved in this investment options, they come with a reward. There are variety of different strategies adopted by platforms and several opportunities for platforms and funds to actually add value for the investor.
Last but not the least, it is solely the investor’s choice to trust their due diligence that the platform or funds that they are planning to invest in is the right choice and they are well aware of what they are doing with their money.
It is important for them to have complete understanding of their choice so that they know they are making an informed decision on both investment risks and returns.