Why investing in SME loans is a great way to invest? Part 2
Why an investment in an SME business loan may be better suited for you?
When you invest in an SME business loan, you have the potential to make a profitable return. When invested in the loan, investors earn returns according to the repayment term agreed upon. However, it is vital you remember that the level of return you get will be correlated to the level of risk of the business and the market is operates in. Therefore, always important to do your own research and seek financial advice before making any decisions.
This leads me onto my next point, many SME businesses are not public, therefore some may say they are not as volatile as publicly traded shares.
Just like the share market provides liquidity, investing in SME business loans can also be quite liquid. Investors can reduce their credit risk by selling their investment on a loan exchange. Please note Marketlend may be one of the very few to offer a loan exchange platform that allows you to sell your investment.
1. Fixed Income Securities
When comparing an investment in SME business loans to other types of fixed income securities such as bonds, you may recognise an investment in an SME business may be suited for you.
The biggest risk associated with bonds is interest rate risk. When interest rates rise, like they currently are, the price of bonds can fall.
On the other hand, when investing in SME business loans you have the potential for a higher interest rate work for you rather than against you. And like all investments, your level of returns is dependent on the level of risk you undertake. Which is why it is important before making the decision to invest in SME business loans you consider the key factors discussed in part 1 to this sequel on SME business loan investing and obtain professional advice before making any decisions.
PROPERTY! PROPERTY! PROPERTY! That’s all we have heard over the last two years. I think I am about sick from hearing how much your friends’ neighbour sold their house for. I mean good on them, their timing in the market couldn’t have been luckier. Unfortunately for investors like yourself and I we might not be so lucky.
Why is this the case?
As you are probably aware, the Reserve Bank of Australia (RBA) has and will continue to increase the cash rate to curb rising inflation. As a result of this, Banks and other financial institutions have and will likely continue to pass this increase in interest rates to borrowers.
What does this mean for you?
Rising interest rates as you would expect, increase the cost of borrowing. High interest rates tend to decrease the demand for property, driving down prices and putting investors prospects of a capital gain on their property at risk.
Like I said above, as an alternative you could invest in SME lending where a rise in interest rates could work in your favour. For example, fin-tech companies such as Marketlend have recently passed the increase in the RBA’s cash rate onto borrowers. By passing this onto borrowers, investors can reap the benefit of higher interest payments on their investments.
A cash bank deposit is likely considered the safest and simplest investment asset. And this is the VERY PROBLEM for investors looking to grow their investment portfolio. Just like the oracle, Mr Buffet himself says ‘the worst investment you can have is cash’ and here is why;
- Inflation erodes the buying power of cash over time
- Interest rates for the past 5 years have been at all time lows
- The significant opportunity cost as you forgo investments in other major asset classes such as SME lending.
4. Alternative Investments
Lastly, we consider alternative investments such as cryptocurrency.
I think it is safe to say that for investors in the Crypto market is has been nothing but short of an emotional rollercoaster. Yes, investors have gone from having nothing to millionaire in the space of 5 years. However, there are also many who have gone from hero to zero in a very short period. Price volatility is a major problem in the cryptocurrency market.
On the other hand, you may be able to avoid high volatility and price risks in this market by considering an investment in SME business loans. SME business loans, unlike cryptocurrency, have an intrinsic value.
By investing in SME businesses, you are essentially funding their projects and business operations to enable them to continue to provide goods and/or services to customers. In return for this, you will be entitled to a return.
Dual investing provides users a chance to buy cryptocurrency at a lower price or sell at a higher price in the future. While this does allow investors to hedge the risk of the price volatility of cryptocurrency there are still risks present. For example, you could buy the cryptocurrency at an agreed lower price, but the market is still so volatile so who is to say it won’t deep even further. This also applies to crypto investors who have agreed to sell their cryptocurrency investment at a high price.
While cryptocurrency can offer significant returns, it comes at the expense of a very volatile market that very few investors can beat.
If you are still with me, then congratulations because you may now be ready to invest in SME business loans.