The Quest for Income: Market Place Lending Comes of Age

The entire investment landscape has been affected by uncertainty – the Bank of England (BoE) has introduced a new round of Quantative Easing, Brexit may be soft or it may be hard, and equity markets are said to be fully valued. BoE measures to protect the economy long ago ended the days of adding 3% by moving cash from your current to a savings account.

The hunt is now on for income, so what alternatives are available to investors? One area worth exploring is the burgeoning marketplace lending sector, where technology entrepreneurs and financial stalwarts alike are producing new ways of linking financial demand to supply.

Crowdfunding, in its narrower definition, involves equity investment in smaller, private start-ups or early-stage companies, facilitated by an online platform. Peer-to-peer lending (P2P) involves a similar method of distribution, but instead entails lending to individuals and businesses over a short- to medium-term in return for regular interest payments and has attracted a large following among income-focused investors.

‘The peer-to-peer finance industry has grown exponentially over the past decade, becoming a disruptive force in the consumer and business lending markets,’ said Suzie Neuwirth, founder and editor-in-chief of Peer-to-Peer Finance News, a magazine focused on the UK P2P industry.

‘By offering an alternative to high street banks, the industry has secured financing for thousands of eligible borrowers, offering more specialised credit risk assessment and quicker service. Amid low interest rates and a volatile stock market, investors have benefited from highly competitive, steady returns. £6.5bn has now been lent through the UK’s largest platforms, according to the latest figures from the Peer-to-Peer Finance Association, but there is still plenty of scope for growth.’

‘£6.5bn has now been lent through the UK’s largest platforms’

In a further boon for the industry, the Government has recently launched a new type of ISA especially for sheltering peer-to-peer returns from taxation. The Innovative Finance ISA (IF ISA) enables investors to allocate up to £15,240 to P2P investments in the same way they might invest in cash or shares. However, P2P platforms require direct authorisation from the FCA to offer this product and while many platforms have applied, only a handful have been approved thus far.

Suzie Neuwirth believes take-up will be big: ‘The Innovative Finance ISA is set to propel the industry into the mainstream. The recognition from the Government alone will go a long way towards attracting new investors to the sector, and the proposition itself provides a tax-free and potentially lucrative opportunity for retail investors.’

Let’s look at a few of the many platforms operating in this space, their core offerings and some key considerations for you as an investor.

UK Bond Network (www.ukbondnetwork.com)

UK Bond Network (UKBN) combines traditional corporate bond structuring techniques and peer-to-peer platform technology to provide investors with direct access to secured, high-yielding bonds.

Bonds are issued by both private and listed companies – to date these have included both AIM and main-market businesses – who are seeking between £500,000 and £4million of funding. Investors can bid to lend from £5,000 upwards to these businesses, typically targeting returns of between 9% and 12% gross per annum. Bonds will always offer a form of security and those with a term of 12 months or more are transferable, giving investors the opportunity to trade before maturity. Furthermore, borrowers can opt to include additional, performance-related upside in their offering, such as royalties, warrants, or convertibility into equity.

UKBN’s lending team undertakes thorough due diligence and manual credit analysis for each bond alongside independent legal counsel, before compiling a suite of offer documents for investors to review. These include a term sheet, an example return illustration, the full legal documentation and a verified company presentation.

UKBN is the first platform of its kind in the UK and is one of a select group of marketplace lenders to be directly authorised by the Financial Conduct Authority to date.

Funding Circle (www.fundingcircle.com)

Funding Circle allows investors to lend directly to small and medium-sized businesses from as little as £20 per time. Now operating on both sides of the Atlantic, it has facilitated over £1.6billion in loans to UK SMEs alone.

Lenders can either back individual businesses, or select an ‘autobid’ feature to spread the risk across several companies. The platform charges borrowers a fee on each funded loan and lenders pay an annual service fee of 1% of their outstanding repayments.

Funding Circle lends from £5,000 to £1m over six months to five years, with an average loan size requested of £60,000. The average return for lenders is 7%c after fees and bad debts. Investors can earn returns of 7.3% a year (as at 4th November) and will be able to do so tax-free ‘soon’ through an Innovative Finance ISA. In 2014, the Government-backed British Business Bank invested £40m alongside other investors to provide more efficient finance to SMEs.

Zopa (www.zopa.com)

Zopa was the UK’s first P2P lending service and  has advanced in excess of £1.8bn to over 150,000 people since it was founded in 2005. Borrowers can be individuals or businesses, but they are typically home owners with an income of £30,000 to £40,000 who are seeking cash to buy a new car, make home improvements or consolidate debt. The APR varies from 3.9% to 34.9%.

Lenders select one or a combination of three different Zopa products to invest in, depending on their risk appetite: Access, Classic and Plus, yielding 3.1%, 2.9% and 6.3% respectively. The Access and Classic products are protected by Zopa’s ‘Safeguard’ fund, which currently stands at over £12m to cover expected losses.

Investors can withdraw their money for free as and when borrowers repay (they often do so early), but for those who lend via the Classic and Plus products, withdrawal (or, more accurately, selling loan parts) incurs a 1% charge. Access and Classic have a £10 minimum investment while for Plus it’s £1,000.

Not only is P2P shaking up cash lending, it’s also sweeping the invoice finance market.

Platform Black (www.platformblack.com)

Platform Black enables investors (or ‘funders’) to buy into short-term corporate debt by facilitating invoice trading and factoring through an online auction process. Funders access the platform on being alerted that an auction has been launched, then bid for all or part of a total sought. The auction closes and ‘winning’ funders transfer the balance, less the discount fee, to the platform for passing on to the business.

On the due date, the ‘end-debtor’ pays the invoice, the balance passing back to funders. Late payment brings funders a 50% uplift on their return for each day overdue.

‘even in uncertain economic times such as these, there is still scope for the portfolio of a discerning investor to comfortably grow’

This service is open to institutional investors including funds, family offices and asset-based lenders as well as pre-qualifying high-net-worth individuals and self-certified sophisticated investors who are able to commit a minimum of £50,000. Investors using Platform Black should note, however, that asset-based financing is not regulated by the FCA.

Still in its relative infancy, peer-to-peer lending has been under the watchful eye of the FCA since April 2014, with the regulator’s approach often heralded as one of the most forward-thinking in the world. Moreover, the Government’s introduction of the IF ISA not only serves to redouble their dedication to and recognition of P2P, but offers yet another attraction for investors to consider.

However, unlike savings with UK banks, investments in peer-to-peer products are not covered by the Financial Services Compensation Scheme. No investment is without risk, so the onus is very much on platforms to disclose ample information to investors to help them to make an informed decision, and then on investors themselves to use this information to assess risks fully – if and how the debt is secured and where it ranks amongst the issuing company’s existing debt, for example.

Alternative sources of income are now numerous thanks to new financial technologies so, even in uncertain economic times such as these, there is still scope for the portfolio of a discerning investor to comfortably grow.