Growth comes at a price. There are two ways to build a platform lending business – a dash for growth, or a more conservative, organic build.
At Money&Co., we have opted for the second approach, using a conservative risk-analysis model. As a consequence, we have facilitated a relatively low volume of loans at under $20 million in five years. But the attrition rate – the annualised percentage of bad debts – is just 0.03 per cent. And our lenders have achieved an average gross return of over 8 per cent per annum – see below for detail.
The problems of the dash for growth are well illustrated by a high default rate, according to a recent report from our friends at P2P Finance News. See the extract from a recent story, below.
PEER-TO-PEER lending hit a record high of £3bn in the first half of the year but losses are also increasing, a report warns.
The latest Marketplace Lending Index from the Link Group, found that marketplace – or P2P – platforms are collectively lending £16m a day.
The index estimates that the value of lending could total £6.2bn for the entirety of 2019.
Property lenders, including Landbay and LendInvest, accounted for three-fifths of the additional lending in the first half of the year at £848m, up by 54.5 per cent compared with 2018.
Business lending totalled £1.1bn in the first six months of 2019, a rise of 14.5 per cent annually, while new consumer lending was up 9.4 per cent to £990m.
Despite an increase in lending, returns have fallen to the lowest on record, according to the research.
Investors are receiving 3.8 per cent on average, down from the peak of 6.3 per cent in 2016.
This was attributed to rising loss rates, which the report blamed on a move away from contingency funds.
Mar-Key 6, rated A+, is 30 per cent filled at the time of writing. The yield on offer is 7 percent. Platform lending of the kind we facilitate here at Money&Co. can be a lucrative activity. The average yield achieved by our registered lenders over more than five years of loan facilitation on this platform is more than 8 per cent, before we deduct our one per cent charge. That return has handsomely outperformed retail price inflation, which has averaged around two per cent over this time.
Historical Performance And IFISA Process Guide
That figure is the result of over £19 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.