Are investors aware of crowd-funding risks?

In an extremely low return environment, investors are turning to crowd-funding and p2p lending for more favourable results.

In an extremely low return environment, investors are turning to crowd-funding and p2p lending for more favourable results.

The rise in p2p is unsurprising – post the financial crisis, banks have been reluctant to lend to SMEs. P2P and crowd-funding allows businesses to bypass traditional financial systems, whilst giving investors greater returns than they would otherwise receive from banks.

Investing via p2p is relatively easy – you can do it online and the entry level is minimal, often only requiring £10 to start with.

However, many p2p investors will not be sophisticated and informed financial players and may not realise that they are exposing themselves to a risky asset class. It goes without saying that investing in p2p is riskier than putting your money in the bank. p2p is also “bad debt” and is often made up of organisations who have been refused loans by banks.

Some commentators have made the criticism that investors aren’t aware that p2p is not covered by the FSCS compensation scheme. However, this seems to be a little trite. The FSCS would not cover the majority of investment portfolios. Expecting returns upwards of 10% without any associated risk is foolish, especially in this particularly gloomy environment.

Unlike many financial instruments, I don’t think crowd-funding and p2p is a particularly opaque area. The buck still stops with the investor who is putting in the capital to do a reasonable amount of research.

I think p2p certainly has a place in the market place. However, it may not cause as much of a buzz in the future if global growth recovers and banks start lending again.