7 Strategies to Avoid Cash Drag
Cash drag has been lately one of the most discussed topics within the P2P lending community.
Investors often refer to cash drag when their money on one of the P2P lending platforms won’t get invested due to the low supply of loans. The non-invested capital won’t bring you any interest when it’s just parked on the platform.
In this article, you will learn more about the causes of cash drag and how you can avoid it.
Reasons for a cash drag
There might be several reasons why your money won’t get invested on your platform.
Here are a few of them:
The platforms have a hard time to list suitable loans
Particularly in niches, where platforms list real-estate projects and business projects, finding an opportunity that would align with the platform’s risk profile isn’t that easy.
When people stop lending money, there won’t be any loans to fund. While this is extremely unlikely, the lower amount of lenders can certainly lead to a cash drag on your platform.
Higher demand than supply
Platforms such as Mintos are extremely popular amongst investors. Their investor base recently surpassed 200.000. Platforms might temporarily struggle to meet the investor’s demand, especially when the demand is growing faster than anticipated.
Your Auto Invest criteria are too strict
One of the best features in the P2P lending niche is the Auto Invest. A function that allows you to define your investment strategy based on certain key criteria. If there are no loans that match your criteria, you will certainly experience a cash drag.
What can you do to avoid cash drag?
In case you expect to suffer from cash drag for more than a few days, you should start thinking about how to solve this issue. At the end of the day, you want to invest and not have your money sit on a P2P lending platform.
1. Wait it out
In most cases, the cash drag problem isn’t a long-term issue. It’s in the best interest of the platform to solve the situation since investors might start withdrawing their money and invest elsewhere. If you treat P2P lending as a form of passive investment, you can as well wait a few days or weeks and evaluate what to do next. In many cases, the platforms solve the cash drag problem during this time.
2. Lower your investment requirements
The easiest way to solve cash drag is to temporarily adjust your investment criteria. Lowering the requirements for your investments might help to avoid further cash drag. This strategy can be applied regardless if you use your Auto Invest or invest manually.
Lowering the investment requirements should not be your long-term goal, however, it can help solve your cash drag problem for a few weeks. In my experience, this has been the fastest solution that worked for me.
Be aware that lowering your investment requirements might increase the risk you are taken with your P2P investments.
3. Use automated investment strategies
Bondora’s Go and Grow such as Mintos’s Invest and Access are features that invest your money without much guidance. When using this strategy, your investment will be diversified across most of the available loans, regardless of your requirements. This might be a quick solution if your Auto Invest isn’t working. A benefit of these features is also the high liquidity of your investments. You can access most of your money within a few hours or days.
The disadvantage of this feature is that you don’t control the diversification. The tool might as well invest in loans, that you wouldn’t invest into by yourself. The liquidity of your capital is highly dependent on the number of users using this tool. At the end of the day, it comes down to demand and supply. Read more about this in my recent article.
4. Move your money to a different platform
If you are not comfortable to lower your investment requirements or just wait until the platform lists more loans that suit your criteria, you can withdraw your money and invest it elsewhere.
If you decide to do so, make sure that you won’t have the same issue on the other platform. Ideally, you diversify your portfolio across multiple platforms to lower the platform risk. This is a good way to get familiar with the platform before you need to use it to solve your cash drag problem.
If you want to solve your cash drag fast, I would suggest investing on platforms that focus on short-term loans. Diversifying your portfolio on platforms such as Envestio, Crowdestor or EstateGuru takes usually longer since their list business and real-estate loans. The turnover of short-term loans is in my experience much faster and the availability higher.
If you are looking for a reliable alternative, I can suggest to try out PeerBerry or Robocash. So far I haven’t experienced any cash drag on those two platforms yet. There are, however, also other alternative platforms, that might be worth looking into.
7. Withdraw your money and invest in a different asset class
In case all the above-mentioned strategies aren’t what you are looking for, you can also shift away from P2P lending and invest your capital into different asset classes such as real-estate, cryptocurrencies (I invest on Kraken.com) or stocks and ETFs. Be aware however that each asset class comes with new risks and challenges, which are very different from what you are used to in the P2P lending niche.
Final thoughts on cash drag
Cash drag isn’t anything extraordinary in P2P lending. Sooner or later you will make your own experiences with this issue. While the primary goal of every investor is to avoid it and maximize the returns in relation to the risk, it’s not the end of the world when you encounter cash drag and you don’t need to panic.
P2P lending is considered a risky investment and no one can promise any concrete returns. Regardless of temporary cash drag, in most cases, you will be able to get more than 10% in returns per year, if you diversify properly. At least this is the case for my P2P portfolio.