The dominant topic in the alternative finance sector is the government initiative to get funding to small- and medium-sized enterprises (SMEs). On the hand, as evidenced here in our News section (see various earlier stories), is the concern that funds are not getting through to the SMEs. On the other, the mainstream is now voicing worries that SMEs will be overburdened with debt.
The drum-beat of banking concern over the weight of debt being placed on UK small businesses is reaching a crescendo.
This week TheCityUK Recapitalisation Group (RCG), led by Aviva chairman Sir Adrian Montague, warned that by March 2021 more than £123bn of government-backed loans will have been distributed via the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS).
Of these, RCG predicts as much as £36bn of loans will have gone bad, overwhelmingly led by BBLS lending (£23bn) which, due to the affordability concerns that we’ve warned about before, will come back to bite.
And especially come back to bite for fintech lenders like Starling Bank and Tide, which will be forced into the expensive process of recoveries (their conduct during this time closely scrutinised) on a huge volume of only moderately profitable loans.
Historical Performance And IFISA Process Guide
That figure is the result of over £21 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.