How to make sure you are not being scammed?
The main purpose of this article is to increase the level of knowledge among investors and save some investors from bad investments. Check out also articles about this topic from experienced P2P investors in the section “Useful reading before choosing P2P platform”. In this article, You will learn what to evaluate in order to avoid being financially scammed.
We are open for suggestions and modifications of the content of this article. If you have any – drop us an email to email@example.com and we’ll add more info or links to it.
We’ve been looking at the p2p market for a while now and we are often surprised by the lack of analysis and research investors do before making their investments. Often it looks like betting, not like investing. With the increasing amount of platforms going down or raising flags, we decided to write this guide.
Just remember, this is not a guarantee for success, but it will save you from +90% bad investments.
So, first things first:
Make sure the platform is technically decent and is working well. It may seem to be an open-ended recommendation, but the main point is – if the project is good, it won’t be using white-lable solutions, design templates and cheesy technical solutions. We’ve seen some p2p lending platforms “for sale” on the market, that you can buy for several tens of thousands, that have basic functionality. The company that doesn’t think about it’s technical side is deemed to fail in the long term. Most of the advantages that companies get nowadays are one or the other way related to efficient technical solutions.
The platform should follow some basic security hygiene as SSL encryption, KYC for its investors, basic AML instructions.
- Usage of common design templates – red flag
- Bad language on the platform – red flag
- The platform looks like something is ‘copy-pasted’ – red flag
Make sure you understand what you invest into. We wrote a big article about differences between loans and equity investments. Remember, loan is a one way road, if it goes bad – it can’t get good later, equity – can. If it’s whiskey or wine you are investing into, make sure you understand the risks related to your investment. 30% risk means you lose 100% of your money in 30% of the cases.
This is subjective, but important. If the company reacts to your requests promptly – it’s a good sign, but it’s not a guarantee. If the company doesn’t reply to your messages – surely it’s a bad sign.
Remember this: if the company is a scam, it will communicate “all is well” until it’s obvious for everybody it’s not. What would you do in their shoes? Being a CEO of a scamming company would you release a message saying “yes, guys, it’s a scam, we have no money on our accounts” and at what stage? For the better understanding, we suggest you to watch the movie “The Inventor: Out for blood in Silicon Valley”
4. The company
The first question of the newcomer is usually, “who is the owner of the company”. The owner of the company is not relevant in this case, the owner gets benefits, only when the company is in profit and pays dividends.
Look at the management team, it’s much more important:
- What background do they have
- What management skills do they possess
- Will they be able to bring valuable experience?
- Do they have a Linkedin profile and what does it say
Use your common sense. We do believe in miracles, but prefer to base our decisions on statistics. What are the chances that a 24 year old person with a sports background will be successful in managing a team of 20-40 people and bringing the company to success?
Look at other signs, too:
- Company registration address – If it’s registered at some apartment – most likely it’s a red flag
- Company board – this is more relevant than the owners, these are people, who actually legally are making the decisions.
- Legislation, under which the company is registered – The company is registered on some islands, but operating from “Krakozhia” – definitely a red flag. Most of the countries require the management of the company to be physically presented at the HQ of the company, in case of licensed operations. The company incorporation under other than HQ location legislation has to have some very serious reasons. All-in-all it will make it very difficult for investors to get something back from such a company if anything at all. Governments don’t like working with each other much.
- Annual reports presented to registry. At the very least, the company has to have their documents in order and report to the state as required. If a company doesn’t present it’s reports to the state – it’s definitely a red flag.
- Check if it has tax payment issues – if it does – it’s a red flag.
Keep in mind that if you want quality research – use trusted sources. There are a whole bunch of ‘services’ that tend to give you some kind of ‘rating’ for the company – it’s usually meaningless. Do your own conclusions.
We gathered some links that may help you at the bottom of this article.
5. Buy back guarantee
Most reviews present it as a ‘huge plus’ to the platform. Remember “Buyback guarantee is only as good as a company itself”. The situation when the company fails or has payment issues is the only case, you’ll need this “Buyback guarantee” and in this case this guarantee will be meaningless and give you nothing. Most likely it is a marketing trick to make the company look good. It might make sense in case of Mintos, when the platform gives a guarantee for its Loan Originator, because the platform is big enough.
Usually, LO gives “Buyback” for a certain loan. If the platform gives the “Buyback” guarantee for LO, it doesn’t make any sense if there are no tricks involved as risks become too significant.
Always read the “small text”, most of such guarantees have special cases, when guarantee is actually not a guarantee, but just a visibility, a creative marketing.
In an ideal world, providing a “Buyback guarantee” would require the company to have a relevant amount of funds to held in a separate account as insurance to be able to fulfil this guarantee, the same way as “Letter of Credit” from any bank works. From the platform’s point of view, it doesn’t have business sense, as these funds have to be loaned to earn profit promised to you.
It is one of the most important things to turn your attention to. It proves if your investment is backed with something or it’s not.
For loan financing, look at LTV (Loan To Value). The loans with LTVs higher than 70% are considered to be risky. The LTV idea of 70% is that you lend 700’000 EUR and the collateral value is 1’000’000 EUR, which is OK in most cases, but dig deeper. What is this collateral, how is it evaluated, what’s it’s real value?
We’ve seen a lot of cases, when LTV is being calculated from the future value of the project – definitely a huge red flag.
Now ask yourself, if the collateral is just a business guarantee or an asset, e.g. land plot in an illiquid location, what’s it worth in a ‘pandemic’ situation? Even if this asset was valued at 1 mln EUR at some point, what would be it’s realistic price and period of its realisation? And remember: it’s a collateral, you don’t own it, it can only be sold to cover a debt (or part of it).
It’s important to understand – who is beneficiary of the collateral. Is it your name in the registry (or your representative) or the same company (or the platform), that provides you with this collateral? If the company has scamming issues, the very same collateral will be used to cover all expenses and debts due at that moment. Who will be making decisions about what debt to cover first, the same company board members?
- In case of a mortgage – it should be registered in the land registry
- If it’s some other guarantee – ask for documents, use your common sense. If it’s a guarantee from some business in different legislation – make sure it has several years of successful, profitable operation and is a decent business overall. Nowadays it’s too easy to open or buy a company, give it a cheesy name “DeutscheSecurity Guarantee Fund” and make collateral look good.
When you invest into equity, collateral serves the same function, but there is a big difference in its operations:
- If it’s a collateral to serve as a guarantee for equity – you have a right (or equivalent) to equity, which is secured by collateral. Meaning a whole different world:
- Equity can decrease in price, but it can recover later (unlike debt)
- Equity can stop earning income, but you won’t lose your investment, it’s just a temporary situation.
- Sometimes it makes sense not to sell the collateral, e.g. when the market is panicking it makes sense to wait until the market stabilizes and perform the sell then, rather than losing money on the falling market.
- Alternatively if it’s a collateral to serve as a guarantee for debt, in case of debt non-performance the only option is to sell this collateral and cover the outstanding debt (or part of it)
7. LOs vs SPVs
Make sure you understand that there is a big difference between those two:
LO (Loan Originator) – is a foreign company, that brings Platform leads that Platform gives money to. As a rule of thumb, LO takes some % from the revenue for the leads they provide. As the evolution of this kind of companies – the bigger and better LOs can offer some services on top like “guarantees”, due diligence etc. We are not saying that all LOs are bad. Dig deeper. Check if the company is on the market for a long time and it has procedures for screening applicants and reducing loan risks.
We can divide the operations of The LO operations in 2 principle parts:
- The platform gives a loan directly from investor to the loaner. This way LO doesn’t bear any loan-related risks and doesn’t have the financial motivation to do proper due diligence. It’s getting % of revenue in any case. Proper due diligence is an expensive process.
- The platform gives loan to LO and LO deals with its creditors. This takes us again to the beginning of this article as LO is another separate company.
- The management of the LO
- The history of its operations. If it’s a fresh company – it’s a huge red flag
- It’s relation to the platform. If it is related, the platform will always favour ‘own companies’ and in the long term, it might create ‘one-sided’ representation of LOs on the platform. Same board members in LOs and Platform – is a red flag.
- If several LOs have the same management – huge red flag. Such LOs either have to have very distinctive business fields or it doesn’t make sense for the same people to run several companies operating in the same area that take loans from the same place.
- What is the product LO is offering and what are this product risks? 12% (plus fees of LO and platform) is a high loan rate. Normally, people or companies that are in the good financial state would not take a loan with such a rate. This way you understand what product you invest into actually means and what risks you have to bear. If somebody is taking that loan – there have to be reasons for that:
- No access to cheaper loans
- Bad or little collateral
- Bad credit history
Take that into account as well, when doing your evaluation.
SPV (Special Purpose Vehicle) – is a company that one creates with a special reason to fulfil some function. The main purpose of SPV is to mitigate risks that might arise from the activities performed by the SPV (read our article about how your investment is secured). This company usually receives funding from the platform, and it is related to the platform and using received money for performing the specified activities, be it development works or some acquisition or operations of the property.
In this case most important checkpoints would be:
- Make sure SPV is related to the platform, because otherwise it’s not an SPV, it’s just another not related company
- Same or crossing management – is a sign of relation of one to another
- Platforms usually create SPVs for acquiring or developing properties – check that acquired property or business belongs to this SPV and relevant registries have the mark about it.
- Check collateral (read the chapter about Collaterals above)
The million dollar question: Is one bad LO/SPV enough for the platform to go down?
Amount of LOs is usually limited and that’s the reason why there is normally a lot more money given to one LO than to one SPV, which is usually limited by the size of the project.
When one LO goes bad, it means for the platform either that all investors who invested into that LO lose 100% of their money or the platform has to cover this loss from its own assets. There are some in-between scenarios when part of the LO assets recovers, but it’s usually a long process (1-2 years) and the price for those activities during this period of 2 years will be deducted first from the assets recovered. If LO is in another legislation – it might take even longer.
However, even with one bad LO a platform will have to make a series of ‘difficult decisions’ and definitely will get a lot of headaches.
When SPV goes bad – means the project SPV was performing went bad. If it had collateral – it still has value. This means You are still able to recover most of the investments from this bad SPV. Such a process will probably take up to 6 months, but the main reason why it’s faster and easier – the assets belong to this SPV and it’s a matter of selling them on the market. In the case with LO – collateral belongs to somebody else and first, it needs to be taken under control and only then sold. In a situation, which involves different countries, this process can become very complicated and long-lasting.
8. Banks/ Payment systems
As per payment institutions, the government regulates them in most countries and they have to perform AML activities on its clients. If the platform doesn’t have a bank in the same jurisdiction, where it’s operating – it creates a lot of uncomfortable questions.
- The platform doesn’t use domestic banks – red flag. Definitely ask those questions and the answers have to be really good.
- The platform changes banks and accounts often – red flag. Meaning something is wrong with the way it operates.
- The platform bank account is in some ‘shady’ jurisdiction: offshore, Cyprus – red flag.
Finally, checking all the points above will not give you a 100% guarantee for the safety of your investments, but it will eliminate most of the scam cases you can become a part of.
Here are some links to make research easier:
List of Worldwide Company registers;
Baltic company registries:
Lithuania or alternative
And we really hope, that you won’t need links below:
Consumer protection services: