4 Keys to Success When Investing in SME Digital Financing

4 Keys to Success When Investing in P2P Financing

SME digital financing has been attracting a lot of attention lately, thanks to its ability to connect entrepreneurs with investors using big data and advanced analytics. For small, growing enterprises, digital financing can be a great substitute for applying for business financing from conventional financial institutions. On the other hand, as an investor, you have an opportunity to earn returns while helping out SMEs.

If you’re reading this, chances are you’ve been thinking about investing in SME digital financing. Before you jump into the platform, you need to do your homework first. How do you achieve the most benefits from digital financing and invest successfully? Read on to find out.

Research first, invest soon after

First things first, do your research. As with any investment, you want to do your due diligence before you take the plunge by understanding how SME digital financing works. Start by researching as many SME digital financing platforms as possible. Look up their websites and read their profiles. Find out how safe it is to invest through their platforms, what happens when SMEs default, and what happens if the platform goes bankrupt. Read their FAQs thoroughly. If a platform doesn’t share many details, that can be a red flag.

Know your personal risk tolerance

The higher the potential returns, the higher the risk— and vice versa. That applies to SME digital financing, too. Thereby, you need to know your personal risk tolerance before you begin investing. Think carefully about how much risk you are prepared to take.

Carefully consider, are you:

(a) an aggressive investor, who will aim for instruments with higher returns no matter how risky they are?;

(b) a moderate investor, who will accept some risk to the principal but adopt a balanced approach?; or

(c) a conservative investor, who ideally has low-risk tolerance?

Depending on your risk tolerance, you ought to select low-risk SMEs or more profitable but riskier financing opportunities on your chosen SME digital financing platform.

Never say no to diversification

Diversification simply means distributing your funds across as many SMEs as possible to prevent loss in case of default. Let’s say you invest RM 1,000 in only one investment note with an interest rate of 20% p.a in 12 months. If all goes well, congratulations, you‘ll get a total of RM 1,200 after the investment period has ended.

But we’re talking about the worst-case scenario here. What if the one SME you invested in defaults? You may end up making a loss on your SME financing investment.

What if you invest in ten SMEs? If one defaults, your investments will still be profitable because nine SMEs continue to provide returns. With diversification, your returns will stay positive and remain close to the expected rate because you don’t need to depend on just one SME. The more diversified you are, the more protected your investment. Even defaults will hardly disturb your rate of return.

You can and should reinvest your returns

Besides diversification, you can also maximize your returns with reinvestment. It simply means using your capital gains to fund other SMEs. Without reinvestment, you will only receive the expected rate of return from SME financing. But with reinvestment, your returns will be distributed to other SMEs. If you do this consistently and continuously, you may multiply your total returns over time.

Besides the four tips above, keep in mind that investing in SME digital financing also requires consistency. When you diversify and reinvest, do it regularly and continuously.

This article was written by Funding Societies, the first SME digital financing platform in Malaysia. We provide working capital financing for small and medium-sized enterprises (SMEs); we also offer investment opportunities with returns up to 14% per year. To learn more about us, click on our website here.

You can also see our up-to-date progress and statistics in Southeast Asia here.

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