Earning Residual Income by Investing Online in Business Loans

A new popular financing option for small businesses that has emerged over the past decade is online business loans. This is due to banks scaling back on loans to small businesses. According to a Harvard Business School study, nearly half of all bank loans were to small businesses in 1995, dropping to about a third by 2012.

Alternative lenders use algorithms and technology to analyze conventional credit standards, including cash flow and personal credit scores. They also evaluate alternative metrics such as vendor payments and social media. This results in them offering easier and quicker access to capital, including lines of credit, term loans and accounts-receivable financing.

This new trend has opened up new investment opportunities for those looking for a passive income or alternative retirement investing. The money loaned by the alternative lenders does after all have to come from somewhere. There are a number of different online platforms that potential investors can invest in. Each have different characteristics and are often aimed at different target markets.
Peer-to-peer (P2P) lending is one of the new methods of debt financing enabling people to lend and borrow money without using traditional financial institutions. Utilizing the power of big data and technology, P2P platforms put investors and borrowers in contact with each other cheaper and faster than any bank is able to do.

P2P lenders have recently grown rapidly and provides passive income to investors. P2P investments have a lower correlation and less volatility than stock markets do. They also offer a higher return on investment.

Interest rates are at the lowest ever since 2008 and many investments that have historically been “safe” e.g. government bonds, currently carry negative yields. This makes P2P loan investments in 2017 a very attractive proposition.

Debt-based crowdfunding commonly referred to as “crowdlending”, is another type of crowdfunding that is getting a lot of attention. This crowdfunding model works by asking for resources and support from other investors in return for interest.

When an investor invests in debt crowdfunding, they receive shares for the investments and expect that the company or startup they are funding will eventually pay dividends. The startup may also develop and grow over time and hopefully reach a stage where the investor will be able to sell the shares for a profit.

With debt crowdfunding, investors invest in some type of debt instrument, where the objective is to lend money to the company with fixed interest and repayment terms.

Investors can choose from a number of debt instruments if they want to invest in a debt-based crowdfunding platform. Some instruments are strictly interest-based while others cater for buying shares that are based on potential company growth. There are also unsecured and secured debt instruments. The interest rate offered is based on the risk profile of a specific company.

The third option in the online investment space is Crowdadvance. This is an online marketplace where investors pool their capital to offer debt funding to businesses. Investors have to be accredited first, but once this is done, they can invest as little as $500 in a range of commercial investments. This option seems to be particularly attractive for retirement investing.

Investors are provided with access to pre-screened investments that individuals would not normally have access to. Investors can then analyze and browse the offering materials and decide on investing in specific companies.

Self-Directed IRAs: Diversify Your Retirement Savings

Crowdadvance has teamed up with iPlan Group to offer investors the ability to invest directly in small businesses through IRA accounts.

Key Takeaways

• Self-directed IRA custodians have recently emerged, creating a more tax-efficient means to purchase alternative investments.
• Investing in alternative investments through an IRA may help maximize potential returns without increasing risk.
• IRA accounts are well-suited for alternative investments.

Self-Directed IRAs: Diversify Your Retirement Savings

Over the past decade, online lending has proven to be a profitable alternative investment offering attractive risk-adjusted returns. According to Forbes there are over 28 million small businesses nationwide.  

Unfortunately, many investors with wealth concentrated in retirement accounts have been unable to participate. This is because most alternative investments have traditionally only been available through taxable accounts. The big financial institutions that act as custodians for Individual Retirement Accounts (“IRAs”) have typically only allowed conventional investments like publicly traded stocks, bonds, and mutual funds. This has made it exceedingly difficult for the average investor to in alternative investments in a tax-advantaged account. The result has been a reduction of up to 40% in take-home returns due to federal taxes alone.

There’s good news: In recent years, self-directed IRA custodians have emerged – driven by demand for a more tax-efficient means to purchase alternative investments. These companies enable investors to diversify retirement funds and allocate savings more efficiently in a centralized account.

Getting the Most Out of Your Investment

According to the Tax Foundation, U.S. workers paid an average income tax of 14.16% in 2014. Since investment income is commonly taxed as ordinary income, taxes can greatly reduce the take-home return on an investment. For example, at a 14.16% tax rate an investor who invested $10,000 and earned 10% in a given year would only take home $858 of their $1,000 dollars earned. This example assumes that all earnings were taxed as ordinary income.

Based on U.S. Census Bureau data, the national average retirement age in the United States is 63 years old. This means that approximately 40 years of work are needed to save for retirement on average. Some investors may try to retire early by dialing up the risk of their investments, and therefore the expected potential returns. Instead, IRA accounts provide an opportunity for investors to pocket more money without any increase in risk. This course may boost take-home returns earned and help reduce the number of working years needed to retire comfortably.

What’s the downside? To compensate for tax advantages, the U.S. government imposes restrictions on withdrawing money from an IRA account prior to retirement age or certain qualified events. To maximize the benefits of an IRA account, funds must be kept in the account until retirement.

Why Choose Alternative Investments Through Your IRA?

Although the tax benefits of IRAs are well-known, the lack of access to alternative investments limits their benefits. One common frustration with IRA funds is illiquidity. However, when paired with an alternative, such as P2P and small business lending investments, this is in fact their greatest benefit.

Illiquidity is often viewed as a dirty word in the world of taxable accounts. This reputation is undeserved, though, because there are many benefits to illiquid investments. Some benefits include reduced volatility and a lower beta, or correlation to the broader stock market. As such, investors who purchase illiquid investments through IRA accounts may have an easier time stomaching the inability to frequently trade in and out given the long time horizon.

Conclusion

Although dialing up your risk may seem like a sexier way to juice take-home returns, IRAs provide a no-frills, well-suited vehicle for the long-term appreciation of the assets you’re already comfortable owning.

To continue providing innovative ways for investors to potentially earn better returns, Crowdadvance has teamed up with iPlan Group Investors now have the ability to invest on the Crowdadvance platform through iPlan Group accounts. This unique relationship allows Crowdadvance investors to easily invest through tax-advantaged retirement accounts with relatively modest fees. You can learn how to set up your iPlan Group and invest with Crowdadvance here.