ArchOver has teamed up with The Telegraph to produce a series of articles to help educate investors on the UK Peer-to-Peer Lending sector. In a brave new economic and financial world, understanding different ways of managing your money is key to success. Peer-to-Peer Lending can help both individuals and businesses navigate a post-Brexit world, with the reassurance that it is a secured and effective method of protecting and growing your money.
P2P Lending and the Search for Better Returns
Given the recent fall in the base rate to a record low of 0.25pc, more people than ever are looking for alternative ways to gain an income from their savings.
With the average cash Isa now paying just 1.09pc,[1] for many people the only way to get the performance they need from their cash is to take on a little more risk.
Investing is one way to do this, though share prices can be volatile. One alternative - lending your money directly to companies or individuals through peer-to-peer and crowdfunding sites - is also becoming more popular.
“To date, in 2016, approx. £2.3bn has invested in peer-to-peer lending in the UK, according to the Liberum AltFi Volume Index. [2]
A growing sector
The rates from peer-to-peer lending are attractive, and the launch of a new type of Isa which allows peer-to-peer loans means that they could become more popular in future The recently-launched Innovative Finance Isa allows customers to receive the returns from lending out their money tax-free.
However, there are currently very few IF Isas available, as each investment must be checked by the regulator, the Financial Conduct Authority (FCA).
Christopher Woolard, director of strategy and competition at the Financial Conduct Authority, recently described the sector as “innovative and growing” and “part of promoting effective competition”.
However, he also acknowledged that some investors may have concerns about the safety of peer-to-peer lending and crowdfunding. Meanwhile, Lord Turner, the former boss of the Financial Services Authority, said that some peer-to-peer sites were not doing proper credit checks on their borrowers - what he called “kick-the-tyres type credit analysis”.
Managing the risks
Investors need to be aware of the risks and the safety nets available if they are to use peer-to-peer and crowdfunding sites.
“Peer-to-peer investment is best suited to people with a properly diversified portfolio,” says Angus Dent, chief executive of peer-to-peer site ArchOver. He adds that those investors who participate in peer-to-peer lending should ensure they understand the security that sits behind their loans, and what will happen if the borrowers cannot pay them back.
Crowdfunding and peer-to-peer (P2P) products do not offer lenders any protection from the Financial Services Compensation Scheme if the company goes bust or loans are not repaid. However, P2P lending platforms provide a service matching lenders (or investors) and borrowers. Unlike with a bank, or company, covered by FSCS, many P2P lending platforms let the lender choose exactly where their money is lent, giving them more control. If the borrower is a business, then the lender can also perform their own due-diligence using the information the platform provides, or other online searches. Not all lenders perform these additional searches, since many just like the “point and click” option that P2P lending platforms provide.
It is important to note that some platforms are more transparent than others, and hold different levels of security over the borrower. Some have contingency funds that can protect investors from loan defaults. Some P2P lenders claim to reduce risk by spreading everyone’s capital between many borrowers, while others choose different forms of security. It is the less transparent models that are likely to be the ones to which Lord Turner was referring when he outlined his frustration associated with the sector.
Secured and insured
ArchOver’s model, which it calls “secured and insured”, involves insuring each borrowing business’s Accounts Receivable (or trade debtors) - the money owed by their customers for goods and services that have already been delivered and against which the loan is secured.
ArchOver has the first charge over these Accounts Receivable (and usually all other assets of the borrowing business) if the business goes bankrupt, and this charge is registered at Companies House.
The borrowers are required to keep the level of Accounts Receivable at 125pc of the loan they’ve received. The most common reason for borrower companies not to repay is because their customers haven’t paid them, credit insurance moves this risk to the credit insurer, a highly credit-worthy entity. If a customer of the borrower fails to pay to terms then the credit insurer pays ArchOver, who depending on the level of security provided by the remaining accounts receivable, either make a part repayment to the lenders or to the borrower company. Although, as Mr Dent points out, any lending carries a risk and should be carried out as part of a diversified portfolio of investments, he believes that this structure greatly reduces the risk of loss.
Ensuring that you understand the structure of any safeguards on your peer-to-peer investment is vital, as well as ensuring you could afford to lose the money if borrowers default.
WHO IS P2P SUITABLE FOR?
The rates from P2P lending can be attractive. It is worth taking a look if you are:
- A relatively sophisticated investor who is willing to put effort in to understand your investment
- Someone who already has a diversified portfolio of investments and cash savings
- Someone who can afford to lose some of their original capital and is willing to take that risk in the pursuit of higher returns
