FT Alphaville carries an interesting blog that delves into the complexities that can lurk beneath the surface of making a loan to a small business. It affords an opportunity to explain what peer-to-peer lending with Money&Co. is all about.
“Here’s a fairly simple problem to solve. Grab your calculators: you have £100m worth of brand new fintech-originated loans with a two-year term. After servicing fees and other costs, the loans are paying 10 per cent interest. How much do you think you will make over the two years?
“Let’s make two assumptions for the sake of simplicity. Imagine that only interest is paid over the two years, and then all of the principal is paid back at once at the end. And let’s pretend it’s a perfect, zero-default world, which is apparently possible to achieve if you try hard enough. So you’ll make a £20m profit. Easy money.
“But as soon as we lose those two assumptions, things get trickier. Now 10 per cent of those loans are going to default over the two years and the loans are fully amortizing, which means that the principal is being paid down with the interest. Now how much do you think you’re going to make? And perhaps more importantly, when do you think you’re going to make it?”
At Money&Co., our lenders have averaged a gross yield of more than 9 per cent. Loans work like repayment mortgages – the capital is slowly paid down over the course of the loan. Here’s how we describe the risks of lending on our FAQ page.
“When you lend to a small or medium-sized business, you inevitably take on risk. While we do extensive credit analysis of businesses seeking funds, it is possible that a business may fail. In that case, you may lose all or part of the money you have loaned to the business. Your capital is at risk, as is the income you would have been entitled to. You should invest only money that you are prepared to lose – and of the money you invest in small or medium-sized businesses, it may be prudent to spread your risk by investing across a range of companies operating in different commercial sectors. This is called building a diversified portfolio.”