Covid, ISAs And The Asset-Backed Lending Future
Fund manager Nicola Horlick’s lending platform Money&Co lost £400,000 in the last financial year as potential investors ducked taking out its ISAs amid the Covid crisis.
Horlick, once dubbed the “City Superwoman”, set up Money&Co and its holding company Denmark Square in 2013 as a peer-to-peer lender but has since changed the business model so it only lends on secured assets, primarily in music publishing and litigation finance.
She said: “We would have made a profit but hardly anybody bought ISAs in the key March-April time. Literally, it was something like 5% of the business on 2019 levels.
Peer-to-peer lenders have come under huge pressure due to the shortage of investors willing to lend and fears of defaults.
Ratesetter was recently sold to Metro Bank for an initial £2.6 million despite analysts’ earlier claims that it could be worth £50 million.
The loss was narrower than the previous year’s £547,000, she said.
Horlick said she had switched from unsecured peer-to-peer lending after becoming concerned about the economy after the Brexit referendum.
Covid had made her ever more convinced of the risks, as a large amount of money had simply been lost for businesses for ever.
“Just because you didn’t have a haircut for six months because of lockdown doesn’t mean you’re going to have three haircuts now,” she said. “That business for the hairdresser has gone.”
She said the government Covid lending schemes, while welcome, had made the situation even riskier as most deserving businesses had already raised money, leaving only the riskiest ones still seeking loans.
She said it was likely many borrowers would struggle to repay the loans to the government, recommending the Chancellor consider setting up an agency to convert them to equity instead of demanding impossible repayments.
Historical Performance And IFISA Process Guide
- Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee).
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.
- Money&Co. has been lending for over 5 years and has only had two bad debts so far, representing a bad debt rate of 0.03 per cent per annum.
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:
- Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
- Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
- Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.
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.