Peer to Business Lending
Alternative Finance Sector Report - October 2014 11
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
at 2.5%, investors need a higher net
return than this to receive a real return
on their investment. Even returns from
the safest P2B loans with the lowest rates
are significantly higher than the current
rate of inflation, providing a real return
on investment and a long-term inflation
hedge.
With minimum investments starting from
extremely low levels, investors can afford
to spread their risk across a number of
different loans. Even investors willing
to take on very high levels of risk can
benefit from investing across a number
of higher risk opportunities to build a
portfolio to suit their needs.
Loans are secured against physical
property, company assets or a guarantee
from the directors. This can make P2B
a safer avenue than several other forms
of alternative finance. Lending is usually
to cash positive businesses which are
often looking to fund expansion or new
ideas, but some of the opportunities at
the riskier end of the spectrum could be
new start-ups or entrepreneurial ideas
requiring seed finance, the risk of which
may be mitigated with tangible security.
Returns are calculated as a fixed
percentage of the amount lent (loan
value) and income can be paid monthly,
quarterly, annually or rolled-up and paid
at the end of the loan term. Loans can
be interest only or capital and interest.
This can provide investors with regular
income which is fixed – it does not
fluctuate depending on the performance
of the borrower and does not change
during the term of the loan (as seems to
be the habit of bank accounts offering an
attractive bonus rate for a limited period)
although if a borrower stops making
repayments then the income stream can
be interrupted unless a provision fund is
in place to cover this risk.
Lending money to SMEs can provide
some protection from the wider economy
as they are a source of diversification and
uncorrelated returns. SMEs operate in
such a wide range of sectors, producing
very different products and services
that the varying opportunities on offer
provide the opportunity to diversify
from mainstream markets. With relatively
low minimum investment requirements,
investors can lend to a number of
different companies across different
sectors, to create a diverse portfolio of
investments.
Liquidity is rightly a major consideration
for investors. Loans are usually made
over a fixed term with a defined exit
(capital repaid at the end of the term)
– and are therefore considered illiquid.
A number of platforms have looked to
introduce liquidity by allowing investors
to sell their loan to another investor
through the platform via an online
marketplace or aftermarkets. There is no
guarantee that a buyer will be found, but
a number of platforms have implemented
this and it has proved very popular
and provided reasonable liquidity for
investors in many cases.
THE TAX TRAP
P2P lending offers attractive rates of return ranging from 5% to 15% per annum. However there are a number of costs that lenders
need to take into account, including taxation, lender fees and bad debts, which can drastically reduce the headline returns.
An individual investors’ taxation on P2P lending is not as simple as a normal savings account where tax is deducted off the
gross interest at the investors’ marginal rate (20%, 40% or 45%). With P2P lending tax is due on the gross loan interest before
any lender fees charged by the platform are taken into account. Current UK tax law does not allow the loss of capital from bad
debts to be offset against income before the calculation of tax, meaning that losses are deducted from post-tax (net) income
rather than pre-tax (gross) income. Default rates and bad debts are therefore very important for investors when assessing the
returns from P2P lending.
The typical gross return for a low-risk loan according to P2Pmoney.co.uk is 6.5% per annum. The following diagrams look at
the returns for the typical P2P lending platform (with 1.5% bad debts and a 1% annual fee) against an asset backed platform,
such as Assetz Capital (with 0.5% bad debts and no annual fee).
