Please note, this is a Guest Post written by Roxana Mohammadian-Molina, Chief Strategy Officer (CSO) at Blend Network.
With the increasing popularity of peer-to-peer platforms, due diligence has become an increasingly important topic for all those investors and would-be investors in such online platforms. So, how should would-be investors go about doing their due diligence not only on the platforms but also on the loans? Here, I provide a brief guide to due diligence.
First, I always like to say that ‘peer-to-peer is like a sandwich; what matters is what’s inside’. What do I mean by this? I believe peer-to-peer is just a tool that allows investors to get access to different types of deals. The deals that investors can get access to through peer-to-peer range from fully unsecured loans such as consumer loans, to semi-secured loans such as business loans (i.e. secured against company debenture or company assets) to loans fully secured against property (peer-to-peer property loans that are secured against first-charge on the property). Would-be investors will need to assess their own risk profile and risk appetite in order to decide what type of security they are comfortable with.
Peer-to-Peer is like a sandwich; what matters is what's inside
Let us focus on what we believe is the most secure end of peer-to-peer lending, peer-to-peer property lending. The reason we believe peer-to-peer property lending is considered the most secure end of peer-to-peer lending is because peer-to-peer property loans will generally be secured against the underlying property.
5 Key Steps to Due Diligence in Peer-to-Peer Property Lending
Generally, we believe there are 5 key steps to the due diligence of peer-to-peer property loans. These are the 5 key steps that we follow at Blend Network:
Meeting the borrower: We believe that eyes tell more than balance sheets. Therefore, it is a very important part of the lending process to meet the borrower in person. This allows our loan underwriters to assess the borrower’s experience and discuss their property project. As a result of this face to face meeting, our loan underwriters are able to get a good understanding of whether the borrower is able deliver the project. Our loan underwriters will look at factors such as the borrower’s experience and track record, the team’s experience and track record, similar projects they have done in the past, as well as their ability to deliver this project.
Assessing the project: The loan underwriting process will also require a formal due diligence process. As part of this formal due diligence process, the loan underwriters will need to ensure that the project makes sense. The assessment of the loan’s viability should include factors such as local property market analysis, supply and demand analysis, understanding of the local rental market and assessment of local schools, hospital and other amenities. Many metrics will have to be analysed. Also, the borrower’s financials including his/her assets, liabilities and credit history will need to be assessed. This will enable the loan underwriters to get a detailed picture and assess the project viability.
Exit strategy: Lenders on peer-to-peer loans will obviously want to get repaid when the loan expires. Therefore, a key part of the due diligence is to understand how the borrower plans to repay lenders. In other words, the loan underwriters need to assess the exit strategy and be comfortable with how the borrower plans to repay the loan. The exit strategy may be selling the property or refinancing the loan with another lender. If the exit is to sell, the loan underwriters will need to carry out research on the local property market so that they are comfortable with the borrower’s ability to sell the property within the timeframe and within the price he/she is planning. If the exit is to refinance and hold the property, the loan underwriters will need to carry out research on the local rental market to ensure lenders are lending less than what the borrower can refinance at. In any case, a clear exit strategy always needs to be in place.
Monitoring: Ongoing monitoring is a very important part of the loan origination process and due diligence. This is in order to ensure that the project is progressing as expected, and if there are any issues, these issues are spotted in time to address them.
Releasing funds in tranches: If all funds are released to the borrower upfront, there are a number of risks to the lenders. First, there is a risk that the borrower will use the funds to finance another project that is running into trouble. Second, there is a risk the borrower wastes the money and doesn’t build as promised. Overall, if all the funds are released upfront, the lender will have less control over the project. This is why it is very important that funds are released in stages and a survey is carried out after each phase and before releasing the next tranche.
Those are the important steps we believe are key part of the due diligence process. At Blend Network we go through these steps in order to ensure that we only list loans that we truly believe in.
Different platforms will differ in their approach to due diligence. So, it is very important that investors and would-be investors do their own due diligence on which platform to use before deciding to lend on peer-to-peer loans. We believe that every investor and would-be investor needs to ensure that the platform they are using also goes through these steps.
Your capital is at risk if you lend to businesses. P2P lending is not covered by the Financial Services Compensation Scheme. Investments are illiquid (the inability to sell assets quickly or without substantial loss in value). Past performance is not a reliable indicator of future results.