Lendy, a P2P platform specialising in property development finance, went into administration at the end of last month, leaving unfortunate investors sweating over whether they are going to see any of their money back. This is obviously regrettable and does none of us any good, especially with some sections of the media seizing the opportunity to pile in with dire warnings of how the entire P2P sector is similarly doomed. This is both irrational and unnecessarily alarmist.
First, people (including commentators) have to understand that high returns of 12% and above invariably go hand in hand with high risk. Second, P2P started out with transparency as one of its core virtues; investors should steer clear of platform operators who are vague or secretive about what they are doing. Third, some failures and consolidation are inevitable in any emerging business sector – it represents normal ‘survival of the fittest’ evolution even if at times it may be uncomfortable.
Finally, I would make the point that property as security for credit is based on the popular but dangerous notion that good old ‘bricks and mortar’ will never let you down. From a purely practical perspective, the family home is often an individual’s only asset of any size or value so is convenient for use as back-up to personal guarantees. The banks love it and, with their big balance sheets and ultra low cost of capital, they are in a position to play the longer game when calling in security on loans that have turned bad. I’m not so sure that it works so well for P2P lenders.
One of the problems is that lenders can sometimes fall into the trap of spending more time concentrating on the value of directors’ (guarantors’) homes than on assessing the quality of the underlying business expected to make the loan repayments. To me that is sloppy lending and a path that leads to loans being dished out to companies that can’t really afford them.
The second problem is that property is not a readily realisable asset – it may take months, even years for a property to be sold at a price likely to give lenders their money back. Sales invoices, on the other hand, are designed to transform into cash quickly. They also reflect the health of the borrower’s business. Forget personal guarantees – give me that sort of clarity any time.