Peer-to-Peer (P2P) lending, more commonly known as P2P financing, has become a popular alternative investment option for Malaysians who want to support local SMEs while earning potential returns. Through regulated platforms such as Funding Societies, investors fund financing requests from SMEs, and these businesses repay the amount over time.

While P2P financing can offer attractive returns, it is important to understand that it also carries investment risks. This article explains the key risks involved, how the p2p lending rate works, and what investors can do to manage risk effectively.

Understanding P2P Financing and Why Risk Exists

P2P financing serves SMEs that may need fast working capital, face long invoice cycles, or do not meet traditional bank lending requirements. These real-world business challenges create an environment where financing risk is higher than conventional financial products.

Investors should always assess each note carefully, understand why the SME is borrowing, and evaluate whether the potential return matches their personal risk appetite.

Key Risks in P2P Financing

1. Default Risk

Default risk is the possibility that an SME is unable to repay the financing. Factors such as business stability, cash flow, industry conditions, and credit history play major roles in repayment performance.

Even with thorough risk assessment, there is always a chance that a business may face delays or financial challenges, which can affect investor returns.

2. Low liquidity

P2P financing investments are typically less liquid than other investments like stocks or bonds. This means it’s not as easy to convert your P2P investment back into cash when needed. Most P2P platforms have fixed terms with payment tenor ranging anywhere from 30 days up to 36 months,  and your money is tied up until the borrower completes their repayments.

Unlike stocks that can be sold in minutes, P2P financing requires patience. If an emergency arises and you need quick access to cash, you might struggle to liquidate your investments. Some platforms offer secondary markets where you can sell your funds to other investors, but even that doesn’t guarantee immediate liquidity or a fair price.

3. Concentration Risk

Investing heavily in a single borrower or a single industry increases the portfolio’s vulnerability. If that specific SME or industry underperforms, the overall portfolio may be affected. A balanced risk approach requires spreading exposure across various SMEs and financing structures.

Understanding the “P2P Lending Rate”

A frequently discussed topic in P2P financing is the p2p lending rate, which refers to the profit or interest rate assigned to SMEs seeking financing. This rate reflects the SME’s risk level, the financing product type, and the tenure involved.

Under Securities Commission Malaysia (SC) regulations, P2P financing rates are capped at 18 percent per annum. This cap ensures fairness and transparency for SMEs.

However, it is important to understand the difference between the SME’s financing rate and the investor’s actual return.

  • The p2p lending rate does not guarantee the same return for investors.
  • Defaults, late repayments, and fees can affect actual earnings.
  • Portfolio strategy influences long-term performance.

Knowing how the rate is structured helps investors assess whether the return potential matches the level of risk involved.

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How Investors Can Manage These Risks

1. Conduct Research and Start Small

Before funding a note, take time to understand the SME’s business profile, industry, financing purpose, tenure, and risk grade. These factors influence repayment behaviour and return potential.

Aside from SME’s profile, investors should also consider the type of financing product which typically features different financing purposes, payment structure and most importantly if there is any underlying security or collateral. 

If you are new to P2P financing, consider beginning with smaller amounts until you become familiar with how repayments work. As you gain confidence, you can adjust your portfolio size in line with your goals and risk appetite.

2. Know the regulatory frameworks surrounding P2P platforms

In Malaysia, P2P financing is regulated by the Securities Commission Malaysia (SC). This regulation ensures that P2P platforms operate within legal guidelines, providing investors with some protection. You can refer to the SC website, which lists all the regulated P2P operators.

Understanding the regulatory framework helps you better recognise your rights as an investor. Platforms that operate without a license are risky, often offering little to no recourse if things go wrong. By choosing regulated P2P platforms, you can reduce the risk of falling victim to scams or unethical practices.

3. Diversify Your Portfolio Across SMEs and Financing Types

Diversification is one of the most effective ways to manage risk. Instead of concentrating a large amount into one SME or sector, spread your investments across different industries, risk grades, and financing types.

How Diversification Works at Funding Societies

Funding Societies supports a wide range of SMEs in Malaysia, including businesses in logistics, F&B, retail, wholesale, construction, services, and more. This gives investors access to various business models and risk profiles.

Investors can diversify across different financing types such as:

Combining short-term cash flow notes with longer-term or secured financing helps reduce concentration risk.

Additional Diversification Options

Some investors prefer to complement their P2P notes with broader investment products that automatically diversify across many SME financing opportunities. One example is the Tradeview Funding Societies Income Fund (TFSIF), which spreads exposure across a professionally managed portfolio of SME financing investment notes originated by Funding Societies and managed by Tradeview capital.

Final Thoughts

P2P financing offers meaningful potential returns and the chance to support the growth of Malaysian SMEs, but like all investments, it carries risks. Understanding default risk, liquidity considerations, concentration exposure, and how the p2p lending rate works will help you make more informed decisions.

By conducting research, understanding the regulatory frameworks that surround P2P lending, and diversifying across SMEs and financing types, investors can build a more balanced and resilient P2P financing portfolio.

 

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