A recent story (see below) reinforces the worth of reminding readers again of the difference between equity and debt crowdfunding – the P2P loans that are offered on this site, for example. Here, Money&Co. CEO, Nicola Horlick, explains the pluses and minuses in a recent column in CityA.M.
“The risks to individuals investing in startups are considerable. Fifty per cent of UK startups fail and the FCA has warned that individuals investing in them through an equity crowdfunding site have a high probability of losing all of their money. This is not true of debt sites like mine. Companies that borrow money via Money&Co. must have a minimum of three years’ filed accounts and must have been profitable in their last year of operation.
We take a first-ranking debenture over all of the assets of the company and any pre-existing secured debt must be discharged. We will allow a company to have a facility from an invoice discounter, however, as this is helpful to its cash flow. None of the companies that have borrowed via Money&Co. so far have missed a monthly repayment. It is inevitable that there will be some bad debts eventually, but we estimate that this will not exceed 1 per cent of monies lent.”
Equity Success and Failure
Equity fails are very frequent, but the successes can be spectacular. Investors who backed money transfer start-up Revolut during a crowdfunding round two years ago have now realised returns of 19 times on their original investments, according to data from Crowdcube and reported just now in FinExtra.
Revolut originally raised £1.01m via Crowdcube in July 2016, only a year after the company was founded, and at the same time as Balderton Capital and Index Ventures made investments. At that point the company was valued at approximately £42m.
In April this year, Revolut received a $250m investment led by DST Global, setting a valuation for the company of £1.2 billion, making it one of the first crowdfunded unicorns. At the same time, crowd investors were offered the opportunity to sell their shares back to Revolut, realising a handsome return on their original investment.
Our latest loan offering is A-rated and property-backed with a fixed-rate yield of 8 per cent, and a term of five years. It’s proving popular, and is currently 62 per cent filled. Our lenders have achieved average returns of over 8 per cent on the more than £12 million facilitated by Money&Co. in the past four years.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (ISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income.
A Process Guide To Innovative Finance ISA Investment
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 2018/19 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.