What if we told you you could help the real pillars of the Australian economy and potentially earn a higher return on your money than you could possibly hope from a term deposit – all with one simple investment?
Sounds too promising, there has to be a catch, you might say. But this isn’t one of those ‘too good to be true’ money-making opportunities – just a chance to learn about a type of investment you may not have heard of and how you might use it to boost your retirement income at a time when interest rates are painfully low.
It’s called peer-to-peer (P2P) lending with TruePillars, a platform that allows investors to lend money to small and medium-sized Aussie businesses at a lower risk than if they invested in a single company, in order to earn a return of 11.01 per cent per annum on average (based on historic returns).
We talked to co-founder and CEO John Baini to understand how P2P and in particular TruePillars works.
P2P lending is just a newfangled name for what’s a very old concept.
“There are some cultures around the world that have always worked on the concept of multiple lenders or investors coming together to loan or grant money to a person or a business,” Baini says.
“But the industry we see today really took off on the back of the Global Financial Crisis, when banks around the world pulled back from lending to all types of businesses, but especially small businesses.”
As the big banks dropped their small business borrowers, P2P lending platforms came in to connect those businesses with investors who wanted better returns than they could earn in a savings account and lower volatility than they often got on the stock market.
Don’t confuse P2P lending with crowdfunding, though. Crowdfunding is where a group of people commit money to fund a new business or create a new product, in return for a stake in the company or some of those products if and when the idea takes off.
With P2P lending, lenders don’t have to wait until a company makes a profit or a product gains popularity to see a return on their money, because they receive regular interest distributions on the loan they provide – just as a bank would.
TruePillars specialises in connecting investors with small- and medium-sized Australian businesses that want to borrow money.
TruePillars’ credit assessors carefully vet every potential borrower and if they meet the platform’s strict lending criteria, the borrower is allowed to post its business information, how much it’d like to borrow and how quickly it intends to repay the loan on TruePillars’ platform for investors to peruse.
Each loan is given a risk rating by TruePillars, based on its experts’ risk assessment of the business, so investors can decide whether they’re comfortable with lending to that business.
The loan is then cut up into pieces called units, which are worth $50 each, and the fun bit begins!
Once the loan goes ‘live’ on the TruePillars platform, investors bid in an auction for the chance to be among the people who’ll fund the loan, simply by posting how much they’re willing to lend to that business and the interest rate they want in return.
When investors have put in bids for the entire loan amount, the individual investors with the most competitive bids – that is, those with the most reasonable expectations on the interest rate – have their bids accepted by the borrowing business and are issued with units in the loan equivalent to the total amount they individually agreed to lend.
That usually means hundreds of people are all lending to the same business at the same time, in a process called fractionalising.
The borrower makes repayments on both the loan capital and interest every month, and individual investors receive monthly payments at the interest rate they bid, minus a flat 2 per cent cut taken by TruePillars. So, for example, if the borrower’s interest rate is 15 per cent per annum, the investor will receive a 13 per cent per annum return on their investment.
TruePillars has an easy-to-understand video that explains how the process works in just two minutes.
You don’t need to be a high roller to get in on TruePillars’ loan auctions because the minimum loan bid is just $50, equivalent to a single unit.
“Let’s say you want to invest a total of $1,000 in P2P loans,” Baini explains. “The low unit price means that you could invest in 20 different loans to 20 different businesses by putting $50 into each one, allowing you to diversify your investment.
“Our product’s not capital-guaranteed so if a borrower does default on a loan and we have to write off that loan, the write-off will pass through to investors, but the objective is that by diversifying, the capital loss on any given loan is offset by the interest you’re earning on all of the performing loans that you’ve funded.”
Nor does P2P investing with TruePillars require you to lock up your money for a long time, because the loan maturities on its platform range from one month to five years. And investors who want to exit a loan before it matures can offer fellow investors the opportunity to replace them on a secondary marketplace TruePillars runs.
The rate of return earned by investors depends on the loans they choose to provide funding for, but the average rate was 11.01 per cent per annum as of December 31, 2019.
Baini says that TruePillars investors tend to use P2P lending as one of a number of investments in a diversified portfolio, particularly when low interest rates such as those Australia’s currently experiencing make some more traditional investments, such as term deposits, less attractive for retirees seeking a regular income.
That P2P lending with TruePillars offers payments on a monthly basis, rather than quarterly or less often, as is the case with dividend stocks, has also made it a helpful income option for some retirees.
“Generally speaking, diversified exposure to loans can be reasonably predictable in its return and volatility,” Baini says. “But we always recommend that people do some research of their own and we’re happy to answer any questions and provide information that supports that research process.”
If you’d like to learn more about investing through True Pillars, its site has a wealth of info written in everyday language, including answers to all of the frequently asked questions.
One big advantage TruePillars offers is feel-good, though, rather than financial.
“The vast majority of our borrowers have less than 20 employees and the reason they come to TruePillars is normally growth-related – they’re profitable, performing well and need funding to expand,” Baini explains.
“If it’s a restaurant, perhaps the loan is for upgrading their kitchen or refitting their premises. For others, it can be to buy a key piece of equipment or transport, or because they’ve become big enough to buy another business to add to their own.
“What our loans fund is usually quite transformational for these borrowers, so it allows them to go on to create more jobs and contribute more to the economy.”
These real pillars of the Australian economy have often found it difficult to get a loan from one of the big banks.
“They’re not bad businesses,” Baini emphasises. “It’s just that our major banks find it more economically attractive to concentrate on larger businesses – the banks find it hard to support small businesses and still make a profit on them.
“So these businesses are simply looking for someone to actually value their business and take the time and attention to analyse its financial strength, not just the value of the security they can put up.”
TruePillars makes its own profit by using its expertise to choose the best businesses to lend to and connecting them with investors on its one-of-a-kind online platform.
“Our profits don’t increase by charging borrowers higher interest rates and never will,” Baini says. “Investing with us means funding loans to local Australian business so business owners get the finance they need to thrive while investors achiever a fair return for risk, while earning regular income as borrowers make repayments.”
Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.
Investing with TruePillars means funding loans to local Australian businesses. They get the finance they need to thrive while you earn regular income as they make repayments. Sound good? Visit our website to learn more.