Flender from my investor’s perspective

Some months ago I published an interview with Kris Koik, Founder and CEO of Flender. The platform just launched some months ago und we only saw slightly more then 10 loans on the public marketplace until now. Public marketplace? Yes there is a private market place as well, confused? I’ll try to explain:

How flender works

Flender has a special feature, which comes from the basic idea, which wants to offer a platform to friends. This is where the name Flender, has its origin. It is composed of “friend” and “lender”. The idea behind is that if someone needs money (no distinction between private or sme loans), the borrower has the possibility to launch a private borrowing project firstly, which can only be seen on invitation. Should the loan not be completely funded by friends and relatives, the borrower can still decide if he wants to make the project available to the public. This has not happened to consumer loans yet and I don’t know how many there have been in total. I question it generally if this works with these kind of loans. If I am in need of money, then I would ask my best friends directly, and would not go via a marketplace (although the advantage would be that there is a contract in place). I can very well be wrong about that and there is demand for such a service. Would not be the first time to be wrong for me. 2011 I did not believe that tablets had any chance in the market… look at the development now.

I still think the idea of flender is great, but I see it applicable more in the area of sme loans. If a friend would ask me for a loan for his business, then I would like to have it done through a platform, where the rules are clear and binding. For my friend it would have the advantage that he could ask several people for funds and can share his presentation with them. In most cases the friend funding would not be enough, and such projects could still be added to the public marketplace. In my opinion this is a huge advantage for us investors, a psychologial one. The borrower has already got funds from his personal network and should therefor be more motivated to pay in time. Who wants to deal with angry friends who did not get their money? If I invest in such a project I strongly believe the repayment moral is higher, I see that as additional, but of course intangible, security. As the borrower pays a monthly installment, none of the lenders can be preferred. I know, this is all theory, but I believe this model can function. Speaking for myself I can say that I would have a much better feeling for a project where friends of the borrower already have invested. Of course this is no guarantee, but I see it supportive. You can’t see if any friends are involved, but you can always ask 😉

Until now I have funded 4 projects

Four projects received funding from me, but only one has so far a duration of more then one month. This project has already made 2 payments on time. The other three projects are due to redeem in September. Then I will see if they pay on time.

What else is important?

At the moment the funding period is pretty long (and there is no interest for this period), this is due to the lack of investors (help flender grow and register now). I hope this will get better during the next weeks. At the moment there is only one project open for funding, but you can always ask the support if there are more projects (in private mode). You’ll get then a link to an additional project in which you can invest. One criteria with the credit check is by the way that the borrower must prove that they can pay the first three installements from their liquidity. This is nice, although it can change during the loan.

Wishlist to flender

I wish myself a secondary market 😉 This would assure me that I could pull the plug in a case of emergency when in need of the money. Before this would be realised I would be glad to get a better overview of my logged in area. A portfolio view would be nice. The funding period of the loans should become shorter, or if not, I would like to see some sort of cashback for the waiting period. The single most important factor to me is though that the payments will be on time and that the credit check is performed rigorously (if this is not done properly the platform is soon out of business, but the guys in charge know that. Linked Finance already proved that it is possible to operate in the Irish market with low default rates. Irish borrowers are amongst the best payers, what led to that Ireland was pretty quick through with the European debt crisis, although it was one of the PIIGS countries. Last but not least I wish that the support stays as quick as it is. When founders are so keen to get the job done, this sends a strong signal towards the investor’s community. Please keep up the great work. Click me to register with Flender.

I will report back in approximately one month to give you an update if all investments go as planned. If there are questions, please post them.

What the (quasi) default of Eurocent means for Mintos and us

I mentioned it already sometimes that Eurocent, a Mintos loan originator has to deal with serious liquidity issues. The loans are still being bought back, but without respecting the 60 days buyback rule. So there is money going back to investors pockets, but we do not know how much this will be in the end. I guess that not every cent will be returned, a damage will occur. If Mintos jumps in as savior? I have my doubts about that. This incident is important for the platform and us, I will lay out my arguments in the following post why this is the case.

What has happened?

Some months after Eurocent joined Mintos, some reports about payment issues have arisen and therefor the placement of new Eurocent loans on the platform has been suspended. Further the trading of existing loans on the secondary market was set out. According to a statement from Mintos the reason for the liquidity issues are due to a missing refinanceing of a bond. And exactly this circumstance was not foreseeable for Mintos (before Eurocent was granted access to the platform) when they fullfilled their due diligence on Eurocent. Seemingly at that point in time there was no reason for doubt that the bond will be refinanced. Even if that was the case, this really shows to us that the loan originators are not very well capitalized und some events can quickly lead to liquidity issues.

Why is this good for us and Mintos? 3 reasons:

1) The buyback guarantee is not sacrosanct:

Taking Eurocent as an example (I already said that repeatidly), we can see that the buyback guarantee is only worth as much as the loan originator is capable of payingt.

2) Diversification is important and appropriate even with buyback in play:

With Mintos we have likely the biggest choice of loan originators (in Europe at least), from whihch we can buy loans. Therefor we can distribute our money between a lot of originators and absorb some Eurocent style shock.

3) Mintos will have a (much) closer look:

Mintos already announced that measures have been taken that such an Eurocent occurence does not happen again. I find this a little bit special due to the fact, that they already told us that this event was unforeseeable. The question might be allowed how can they take measures for something that is not foreseeable? I admit, this rhetoric question is a bit mean, but justified. In this case they already now what went wrong and they can adapt. But they won’t be able to be prepared for any possibilty, but this leads to the point I try to make: It is always possible that something happens, with every investment there is risk. Finally this incident should help, that Mintos gets more secure to invest for us.

Why diversification is no cure-all

Diversification is a basic prinicple in finance. One distributes the risk and minimizes the default’s impact. Alltogether the risk to get hit by a default increases, but the impact decreases. Ok, let’s assume that we have spread our money over 100 loans and we can now sleep peacefully. As long as the economy flourishes everything is good. But if there is a recession looming, the image could become worse, although we diversified properly. Loans on Mintos are risky, as the borrowers tend to be more subprime, which will suffer the most from a recession, as they loose their jobs. If we now have a portfolio with those types of loans, diversification loses its benefit. The keyword here is correlation. If two investments behave similarly we speak of a positive correlation, which means that although we are diversified, this does not help us much, as behind these loans the type of borrower is the same.

Keep that in mind should we move towards a recession, as the whole p2p industry will suffer from that and the default figures will skyrocket. Of course this represents only my hypothesis and hopefully I will be proven wrong. What is sure is that there will be another recession down the road, maybe not tomorrow, but at any point in time there will be a recession.

What can we further do to minimise our risks?

We could try to assess financial figures of loan originators, if we have access to them. I guess only a fraction of the p2p investors would be able to do that. I think I would be able to run such an analysis, so why don’t I do it? It is really really time consuming and the results would not help much. Most loan originators are in no good financial shape, otherwise they wouldn’t borrow at p2p platforms. Most of them are young companies without any track record.

Conclusion – how do I proceed?

I go on as I used to: Diversification with the knowledge that the correlation will beat me up should we slider into a recession. I do hope to see that coming before it will happen. If am going to succeed with this strategy I do not know, at least I do know that there are risks out there. If someone became afraid due to what I have written or by the Eurocent incident, I have the following advice for you: Pull out all your p2p money. With interest rates of 12 percent or above we have to deal with complete defaults, we are in a high risk teritory with p2p. And some more pieces of advice: Try to listen to your common sense, be critical. Don’t believe everything what your banker, financial experts, bloggers (that includes me) and your friends at the pub are telling. Most of the time we only get to hear stories of sucesses, busts won’t be mentionned to much 😉 Or did a friend tell you about how he burnt some cash with dumb decisions? I guess not, and when I hear success stories around my friends I mostly think I am pretty dumb and the worst investor the earth has seen 😉 What I want to tell you by this: Most people have their own agenda, even if there aren’t any financial goals involved. Some people like to be seen as a “star”. Keep that in mind and try to build your own opinion. It is your money, and you suffer the losses yourself, no one else. Be critical, as well to what I write here. It is possible that I interpret somethings wrong or don’t see the big picture. I try to write my posts as objectively as I can and won’t recommend anything what I don’t like (even though I am using affiliate links).

Ok, that was longer then expected, hopfelly I did not bore you. If questions arise, please post them.

DoFinance news: Cashback and loyalty scheme

Some time ago I already introduced DoFinance to you (need to check it out due the buyback functionality). Since then some weeks have passed and the platform has worked intensively behind the scenes. Now is the time to share some news with you.

Cashback for new investors

If you sign up through a DoFinance link (this one brings you directly to registration) on this blog you automatically get 1 percent cashback for your average invested deposits during the first 30 days after registration (minimal investment amount is EUR 100). So you’ll get 1 additional euro for every hundred you are investing, with 1k invested this makes 10 bucks which you can invest in fish & chips plus a pint 😉 Or do whatever you like. Important: Cashback will only be applied if you use one of my links. If you decide to start with 25k you get better interest rates as a surplus (see next paragraph).



Loyalty scheme for existing investors and new ones (14% interest)

Also there is reason for joy for existing investors (applies also to new investors) as well: DoFinance starts its loyalty scheme. There are two ways to get accepted: 1) You invest at least 25k (which is too much for must of us, including me) or 2) you help to improve the platform with your suggestions, hints on errors and sharing of new ideas for them. I cannot quantify how much you need to deliver to get accepted to the scheme. This is decided only by DoFinance.

VIP’s questions and problems will be handled with priority, but they promised to me to handle everyone else’s querries in an adequate amount of time as well 😉

What else?

You see, DoFinance really wants to move something. The next steps comprehend the addition of further currencies, improve the transparency by sharing more information on the borrowers. Additionally the investment process shall be leaner and easier by the addition of new filters. And of course your ideas will be implented if they are backed by others. To some part we as investors are able to influence the platform’s future path, at least partially.Use this link for registration to get 1% cashback.

In case of any questions, please post them here.