Bidding is very simple. You find a business you like. You decide how much money you want to invest. You decide how much interest you want. Done.
If you are investing small amounts and you are more interested in helping businesses in Africa than making money then that is all you need to know. If you also want a chance at getting return on investment then read on.
For the beginning investor
There are some risks. You receive some interest. But sometimes you lose money because people don’t pay back. Sometimes you lose due to exchange rates. 10% in interest may seem greedy to you, but suppose 5% of the borrowers don’t pay back and you lose 5% on currency exchange. Suddenly 10% isn’t such a high interest rate. Have a look at the maximum interest rate the borrower is willing to accept. If you are bidding way below that then you are unlikely to make money.
Remember the social return. If you were only interested in making money then you probably wouldn’t be here. Funding that solar power project in Uganda or that school in Kenya also gives a social return on investment that is hard to quantify.
Advanced hints and tips
Spread you risk. Invest in a variety of different businesses in different industries from different providers in different countries.
Think about currency. If the local currency of your loan loses value relative to the Euro you will get less back than you expect. If the Euro weakens you can get more back. The amount that currency fluctuates depends on a lot of parameters that we don’t understand. Historically some countries have weaker currencies than others, so you might want to ask for a higher interest rate in those countries.
Check collateral & security. Some loans are unsecured. Others have land or a car or other things as security. In general the better the security, the more likely you are to get your money back. But even with security there are risks. The partners will make all reasonable efforts to go after the security if the borrower doesn’t pay, but it can be a long process if they have to go through the courts.
Partners are the key. While you are lending money to a specific business, that loan is managed by a MYC4 partner. The partner does a thorough evaluation of the borrower and the partner collects the repayments. We rate our partners with a five star rating system. The more stars the better the partner’s track record and the stronger the alignment of the partner’s interests with your interests.
Partner fees are important. Partners earn fees in two ways – when the loan is disbursed and as the loan pays back. The partners who earn most of their fees on repayments are obviously more motivated to ensure the loans pay back. You can see the partner fees by clicking on a loan and then looking at ‘costs for the business’.
Partners share in the risk. Most Partners have now agreed cover a portion of loan defaults through risk sharing agreements. You can click on the star rating next to the partner name to see what portion the partner is committed to cover and what level of security they have put up as a guarantee. But remember, even loans that are 100% covered by risk sharing agreements still have a risk for the investor if the partner cannot or will not honor the risk sharing agreement. And, Risk sharing agreements don’t cover currency risk.
Avoid idle money. Money you invest in a loan earns interest. The rest of your money, whether it is in your account or tied up in the bidding process or on its way to or from Africa, doesn’t earn interest.
Use Autobids. If you don’t have the time to follow your account on a regular basis you can create an autobid. An autobid will ensure your money gets back to work in Africa automatically.
Use Flexible bids. When you create a bid remember to define the minimum interest rate you are willing to accept. This way you can start out high and let the system replace your bid at a lower rate if you are outbid by someone else.
Good luck with your investments. If you have a great tip that I forgot to write about, please add it as a comment to this blog.