The interest rate of each loan reflects the credit risk of each borrower. The higher the interest, the higher the credit risk. This information is written on the factsheet we attach on each new loan announcement.
All forms of investment have risks, including alternative investments like MSME Financing Platform. Default risk or loan defaults may happen to MSME Financing Platform alternative investments. Strict credit assessment is one way to lower credit risk of default.
To minimize default risk, we urge you to diversify. There are various diversification strategies that lenders can utilize.
Enter the minimum funding amount to each loan
As a lender, you may allocate available funds into as many loans that suit your funding criteria. Through this method, should there be any defaulted loans, the funding you lose would not significantly affect your portfolio.
Example: you fund 50 loans with Rp 100.000,- each. On average, interest rate is 12% per year and provides gross interests of Rp 600.000,-. If you experience a default rate of 3% on your funding, your portfolio would still receive Rp 450.000,- in gross interests.
Enter a larger funding amount to loans with lower interest rates and a smaller funding amount to loans with higher interest rates
As a lender, you can allocate a larger funding amount to loans with lower interest rates, as they have lower risk. Then, you can fund smaller amounts to loans with higher interest rates.
Loans with lower risk normally have flat (simple) interest rates of 10%-12% per year, while loans with flat (simple) interest rates of 13%-16% per year will come with higher risk.
Example: you fund 3 loans, each with Rp 1 million and an average interest rate of 10% per year and 20 loans, each with Rp 100.000,- and an average interest rate of 14% per year. If all loans are fully repaid, you would receive gross interests of Rp 300.000,- from loans with an average interest rate of 10% and Rp 280.000,- from loans with an average interest rate of 14% for a total of Rp 580.000,- in gross interests. If you experience a default rate of 3%, you would still receive Rp 400.000,- in gross interests.
The importance of refinancing
Lenders would receive repayments in the form of principal and loan interest every month. We always advise lenders to refinance their portfolio results in order to maximize interests. All loans on our platform have an average tenor of 1-12 months. For example: if a lender crowdfunds to an Invoice Financing with a tenor of 1 month, then the lender would receive interests in the form of total principal and loan interest at the end of 1 month.
Example: you fund Rp 1 million into an Invoice Financing product with a tenor of 1 month and an interest rate of 12% per year. After one month, you would receive interests of Rp 1 million in principal and Rp 10.000,- in gross interests. Then, you use the Rp 1 million to lend to an SME Loan with a tenor of 3 months and an interest rate of 12% per year. After a month, you receive Rp 333.333,- in principal and Rp 10.000,- in loan interest. Then, you use the Rp 300.000,- of received loan principal to lend to another SME Loan with a tenor of 6 months and an interest rate of 12% per year. With refinancing, you would receive more interests than without.