DIY Investor Magazine
/
March 2017
43
‘SECURITY FEATURES SUCH AS PROVISION FUNDS WHICH
COVER SOME OR ALL LOSSES INCURRED IN THE EVENT OF
BORROWER DEFAULT’
opportunities and diversify the exposure and risk profile
of your portfolio. Crowdstacker sees evidence of a
strong urge from businesses in all types of sector and
industry, to borrow away from traditional institutions,
seeking access to ‘the crowd’ via its platform.
P2P lending is not all about lending to volatile start-
ups; the new platforms seek to disrupt the high-street
banking market which focuses on lending to consumers
and/or small businesses of all types.
Other, more specialist platforms target the corporate
finance space where the businesses may be more
advanced and stuck in a funding gap by not being
covered by traditional banks but too small for investment
banks, or just fed up with traditional finance.
Therefore P2P may be compelling as a financing
proposition for good quality businesses that are too
small to issue bonds or float, and too big to rely purely
on bank loans. These businesses could be sound
propositions for everyday investors offering up exposure
to different sectors away from the market-led pressures
exerted on the stock market.
There may even be diversification within the loans
themselves, with many individual borrowers offering
multiple assets as security and with so many different
loans, the risk to lenders can be lowered even further
WHAT TO LOOK FOR IN AN IFISA
When you invest in the stock market, your money is
not protected by the Financial Services Compensation
Scheme and neither is it when you loan money via a
P2P platform – often seen as a major drawback.
However, good quality platforms offer security features
such as provision funds which cover some or all
losses incurred in the event of borrower default; not a
protection offered by stocks and shares investing.
Others structure loan agreements to include security
features, for example a first charge over easily
accessible assets valued at multiples of the actual loan
amount.
Investors should consider security measures carefully
before selecting an IFISA and be wary if any platform
does not take care to ensure that you do not take on
more risk than you can sustain.
When considering P2P lending, ask the same questions
you would about a company when looking to make an
informed decision about its shares or bonds:
•
Does the business have sound financial goals and
structure?
•
Does its financial ratios seem promising? Short-term
assets (cash, inventory and liquid assets) vs short-
term debts; total debt vs total equity.
•
How does it compare with its competition?
•
How successful is the industry it operates in?
•
What is the loan’s date of maturity?
A business that provides convincing responses to all
these questions could be a potential candidate to use
P2P as a means to raise cash and because of a lack of
funding supply are typically also willing to pay a higher
reward to access funding in this way.
The hoped for end result is a win-win situation for those
involved; businesses able to raise much needed cash
more easily and with favourable terms, and access to
good quality investment opportunities and higher level
returns for investors.
With the added bonus of tax exemption, investors may
consider P2P lending within an Innovative Finance ISA
wrapper as part of their investment portfolio.
Risk warning
Lending to businesses can be rewarding, but it involves a number of risks. If
you lend through Crowdstacker, please be aware that you may lose all of what
you lend. There is currently no active secondary market for the underlying
loan to be transferred if you need access to the capital. You should not lend
more than you are prepared to lose. For more information consult our full risk
warning
. Money lent is not insured
or covered by the Financial Services Compensation Scheme. Tax treatment
depends on the individual circumstances of each client and may be subject to
change in the future.
