P2P Lending Due Diligence: European Investor Guide

P2P lending platforms promise attractive returns, but not all platforms operate equally. Due diligence separates platforms worth considering from those carrying excessive risk.

This framework examines financial metrics, regulatory compliance, and risk factors specific to European P2P lending.

Financial Health Indicators

Platform financial stability matters as much as loan performance. A platform's balance sheet reveals sustainability.

Revenue and Profitability

Profit demonstrates business viability. Platforms operating at consistent losses may struggle to maintain operations during market stress.

Check annual reports for:

• Revenue trends over 3+ years
• Path to profitability (if not yet profitable)
• Cash reserves relative to operational costs
• Debt levels and credit facilities

Platforms like Swaper and Lendermarket publish financial statements, allowing investors to assess stability.

Loan Book Quality

Loan performance indicates credit assessment effectiveness.

Key metrics:

• Default rates across loan grades
• Provision coverage (reserves vs defaults)
• Collection success on defaulted loans
• Concentration risk (single borrower exposure)

Rising default rates without corresponding provision increases signal problems.

Regulatory Compliance Framework

European P2P lending operates under varying regulatory frameworks. Understanding these protections matters.

Licensing and Authorization

Check platform authorization in their operating jurisdiction. Regulated platforms face ongoing supervision, reducing fraud risk.

EU platforms may hold:

• Payment institution license
• Crowdfunding service provider authorization (under EU regulation 2020/1503)
• Consumer credit license

Platforms like Esketit operate under regulated frameworks, providing additional oversight.

Investor Protection Mechanisms

Some jurisdictions mandate specific investor protections:

• Deposit guarantee schemes (rare for P2P)
• Investor compensation funds
• Segregated client funds
• Bankruptcy remote structures

Understand what protections apply. Most P2P investments lack deposit insurance.

Risk Assessment Criteria

Beyond financials and regulation, several factors indicate platform risk level.

Skin in the Game

Platforms investing their own capital alongside investors align incentives. Check if management holds significant platform equity and co-invests in loans.

Operational Track Record

Platforms operating through economic downturns demonstrate resilience. Recent launches lack stress-tested operations.

Consider:

• Years of operation
• Performance during previous downturns
• Management team experience
• Shareholder stability

Transparency Standards

Higher transparency enables better due diligence.

Platforms should disclose:

• Detailed loan statistics
• Historical default rates by grade
• Buyback provider financial health
• Fee structures (all fees, not just headline rates)
• Related party transactions

Opaque platforms create information asymmetry favoring the platform.

Portfolio Allocation Strategy

Even after thorough due diligence, P2P lending carries risk. Diversification across platforms limits exposure to single platform failure.

Suggested allocation framework:

• Established platforms with strong financials: up to 20% of P2P allocation
• Newer platforms or those with higher risk indicators: maximum 5-10%
• Total P2P allocation: consider limiting to 10-20% of investment portfolio

Platforms like Robocash with longer track records may warrant higher individual allocations.

Red Flags Requiring Immediate Exit

Some indicators suggest exiting existing positions:

Financial Deterioration

• Rapidly increasing default rates without explanation
• Diminishing cash reserves
• Payment delays to investors
• Undisclosed related party transactions

Regulatory Issues

• License suspensions or warnings
• Regulatory fines
• Ongoing investigations
• Changes in legal structure obscuring ownership

Operational Problems

• Key management departures
• Website or platform technical failures
• Customer service deterioration
• Reduced transparency in reporting

Ongoing Monitoring Requirements

Due diligence continues after initial investment.

Quarterly reviews should cover:

• Updated financial statements
• Loan performance trends
• Default rate changes
• Platform communications and strategy shifts
• Regulatory status

Set calendar reminders to review platforms systematically.

Tax Considerations for European Investors

P2P lending income faces different tax treatment across Europe.

Common structures:

• Interest income taxed at personal income rates
• Capital gains treatment (some jurisdictions)
• Tax-advantaged accounts (ISAs in UK, similar structures elsewhere)
• Withholding taxes on cross-border investments

Tax laws vary significantly. German investors face different rules than Portuguese investors. Consult tax advisors familiar with P2P lending in your specific jurisdiction.

Building Your Due Diligence Process

Systematic due diligence prevents emotional decisions.

Create a checklist covering:

1. Financial health (profitability, reserves, loan book)
2. Regulatory status (licensing, supervision)
3. Risk indicators (track record, transparency)
4. Red flags (any present?)
5. Ongoing monitoring schedule

Document findings for each platform. This record helps track changes over time and supports decision-making during market stress.

Conclusion

P2P lending offers opportunities but requires active risk management. Thorough due diligence, diversification, and ongoing monitoring provide the foundation for sustainable P2P investing.

No due diligence eliminates all risk. Platform failures occur even among seemingly solid operators. Size positions accordingly and maintain diversification across multiple platforms and asset classes.

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More from Quiet Finance: Explore in-depth guides on P2P lending strategies and portfolio management at quietfinance.gumroad.com

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always do your own research. Some links are affiliate links. Tax laws vary across European countries - seek professional advice to understand your specific obligations on P2P lending income.