The alternative finance industry still retains its status as a well-kept secret. Some commentators in the mainstream media choose to describe peer-to-peer (P2P) lending in reductive and negative terms.
Below, Money&Co. CEO, Nicola Horlick, writes about the strengths of P2P as an asset class – especially when the borrower is a carefully vetted small business – in Professional Adviser. This is particularly timely, as more than £1 million in loan offers will shortly be posted on site – and all will be eligible for the tax-free status of being held within an Innovative Finance Individual Savings Account (IFISA). Money&Co. was recently granted full permissions to offer IFISAs by the Financial Conduct Authority.
Nicola Horlick, who has been a professional investor for more than three decades, explains why her new business focuses on P2P lending and the still relatively new idea of the Innovative Finance ISA.
“The events of 2016 have made it difficult to predict where investors will find steady returns in the future. Politically, we are facing uncertainty at home, as the potential consequences of what seems an inevitable exit from the European Union seem to change daily.
Events abroad meanwhile are dominated by what is happening in the US, where the volatility of change and the frequency of significant news events – what journalists call ‘story burn’ – are increasingly alarming.
So it is hardly surprising, amid the climate of political turmoil and prevailing economic uncertainty, that relatively safe investment havens are hard to find.
There is, I believe, one such haven – not risk-free by any means, but simple and transparent enough to be easily understood and analysed. It is an emerging asset class, known as peer-to-peer (P2P) business lending. This is a sub-sector of crowdfunding – itself an emerging form of alternative finance.
‘Crowdfunding’ is no more than a general term for the process of raising money directly from ‘the crowd’. Typically, the crowd is constituted of a large number of people, each of whom contributes a small sum of money to a specific purpose.
In the case of Money&Co, the company I founded and of which I am CEO, we bring individuals looking for a good return on capital together with carefully vetted, well-established and profitable small and medium-sized enterprises (SMEs) seeking funds for growth. We have also recently introduced property lending.
As a P2P business lender, Money&Co does what the banks cannot or will not do – we fund SMEs and we provide a gross yield of nearly 9% a year to the lenders, who extend credit via our platform.
To be fair, banks have baggage we do not – for example, headcount, bonus culture and general institutional sclerosis. Since July 2014, when we closed our first loan, Money&Co has facilitated P2P loans of close to £9m. P2P loans can now be held in the Innovative Finance ISA (IFISA) and I predict this is going to result in rapid growth for the asset class.
The IFISA was launched almost a year ago, but most P2P lending platforms are still unable to offer it, as they require full Financial Conduct Authority (FCA) approval in order to do so. Money&Co has full FCA approval and so we can now offer the IFISA.
As the larger lending platforms receive their FCA approval, investors will begin to hear more about this interesting option in the ISA market. Investors who subscribe to an IFISA will be able to hold loans in their ISA account and receive tax-free interest.
Money&Co’s loan book is currently generating an average gross yield of 8.95%. Investors can choose to either roll up the interest in their ISA account or pay the interest out monthly. We take a fee of 1% a year and so the net yield is 7.95%.
A tax-free yield at that level looks, we would argue, extremely attractive – especially when compared to the pitiful yields on Cash ISAs. We will also be offering asset-backed loans for inclusion in the IFISA. They will yield slightly less – at around 7% a year net of fees – but I would expect them to be particularly popular with ISA investors.
Under the current ISA regulations, investors can subscribe for one Cash ISA, one Stocks and Shares ISA and one IFISA during each tax year. They can also choose to invest in just one type of ISA and use their whole allowance for that ISA.
The maximum amount that can be invested in an IFISA during the current tax year is thus £15,240. For the 2017/18 tax year, the ISA allowance is going up to £20,000, which means a married couple can put £40,000 into a tax-free environment. Given the cap on pensions, savers will be able to supplement their pension provision through using their ISA allowances each year and the IFISA is an ideal way to create a substantial tax-free income stream.
It should be noted lending platforms are not covered by the Financial Services Compensation Scheme. Asset-backed loans provide greater safety and are ideal for inclusion in an IFISA.
P2P business lending is a relatively new asset class, which is going to see explosive growth as a result of the introduction of the IFISA. Demand will be fuelled by the ability to create a steady tax-free yield with asset backing – something older investors yearn for in the current low interest rate environment.
Through allowing the inclusion of P2P business loans in an ISA wrapper, the government has signalled its approval of this form of investing. It is easy to be cynical about politics and politicians – but this time, I believe, they have got it right.”
Remember, capital loaned is at risk. We have a rigorous due diligence process and require borrowers to be debt-free ahead of facilitating a loan, and we also take a charge on the assets of the borrower as a safety net in the event of default. But do not lend without assessing risk carefully.