Getting Started in 5 Easy Steps
There are many different ways to get started. You can read extensively on crowd-lending before you participate in your first loan. Or you can learn about the basics, lend a small amount of money to a few loans and gradually improve your knowledge and experience. Personally, I prefer the second approach as I find that I learn faster when real money is involved.
This beginner guide is written using the second approach. Its takes the beginner investor through 5 key steps in making the first crowd-funding loan. When I first started crowd-lending, I made several rookie mistakes. Through this guide, I hope to share my experience and help beginner investors avoid some common pitfalls.
Step 1 – Understand how crowd-lending works
Crowd-lending works by matching borrowers and lenders through online lending platforms. The diagram below shows the key roles of each player in the crowd-lending process. While lending platforms do not participate in any actual lending, they play an important role in ensuring the integrity of the entire process. For more details, read here.
Step 2 – Understand the risks
There are several key risks in a crowd-lending transaction: 1) borrower credit risk, 2) platform credit risk, 3) weak underwriting, and 4) regulatory/legal risks. To know more about each risk, read here.
Step 3 – Platform selection
A good starting point would be the 3 main crowd-lending platforms – MoolahSense, Capital Match and Funding Societies. I would suggest signing up with all three so that you get a wide choice of loans to choose from. To know more about the strengths and weakness of each platform, please see here.
Step 4 – Cash Management
I would suggest setting aside $5,000 for crowd-lending across all three platforms. But the exact amount depends on your individual circumstances. Don’t invest an amount that you cannot afford to lose. Transfer $1,000 to each platform and try to lend this to a borrower of your choice. The cashflow between yourselves, the platform and the borrower are shown below. Don’t keep too much undeployed cash at the platform account. See here for more details.
Step 5 – Choosing your first loan
Whenever there is any loan, review the basic information (as shown below). For beginners, choose a stable and easy-to-understand business. It should have a reasonable track record and decent credit rating. Don’t be tempted by higher rates and avoid cyclical businesses (e.g. construction, oil & gas). Take your time to decide and lend the minimum amount per loan. See here for a more detailed discussion.
If you have followed the 5 easy steps, you should be able to participate in your first loan within the first week. Congratulations! Remember to log into the platform regularly to check on the monthly repayment. If you are still serious about crowd-lending, do continue to build up your loan portfolio carefully. And watch out for more articles at letscrowdsmarter.com