Peer to Business Lending
Alternative Finance Sector Report - October 2014 19
PEER TO BUSINESS LENDING
ALTERNATIVE FINANCE SECTOR REPORT
PUBLISHED
November 14
AUTHOR
Luke Jackson
Samantha Goins
BENEFITS
Mortgage over borrowers assets
Security often worth more than the loan
Should provide 100% capital protection
Should reduce the overall risk of the loan
Borrowers willing to put assets at risk have more to
lose by defaulting
RISKS
Relies on up-to-date valuations – value of assets
could be wrong or fall dramatically
Legal and due diligence could be costly
Loans may take longer to issue
Enforcement of assets could be time consuming
The degree of risk will vary depending on the type of
asset used as security and the loan to value taken
PHYSICAL SECURITY
Taking a physical asset as security against the loan is the same concept as a bank mortgage against property. Loans are
secured with a charge over one or more assets. This is often referred to as an “asset backed” loan. If the borrower defaults,
the lender has the right to sell assets to cover the cost of the loan.
There are three main types of security that can be taken:
personal guarantees; legal charges
or
debentures.
A
personal guarantee
is when the borrower pledges to repay the loan from personal assets. This is enforceable by law but
relies on the person giving the guarantee having sufficient assets to repay the loan in full. If they don’t there will be a loss.
A
legal charge
is a mortgage placed on an asset, usually property or plant equipment. The asset can be sold to recover any
money owed if the borrower fails to repay the loan in full. A
debenture
is a charge over assets owned by the company such
as stock, trade receipts, machinery or property not already secured through a legal charge. This gives the lender the right to
take control of the business and sell assets to repay the loan.
The risk to the lender will vary depending on the value of the asset compared to the loan. For example, a borrower may
borrow £750,000 against a property worth £1m – the loan to value (LTV) is 75%. Should the borrower fail to repay the loan, the
property will be taken as security and sold to repay lenders.
An important difference between the two types of security offered is that physical securities are taken on a loan-by-loan
basis, rather than collectively on all loans through the platform. This means that there is no drag on other investments and the
security on a specific loan will not benefit lenders on other loans should their loans fail. With asset backed loans each security
is unique and will match (exceed) the value of the loan. This should provide much more protection should default rates rise
within the sector. Provision funds could be cheaper for the platform to implement and speed up the investment process at
both ends. But they are not sufficient if default rates rise and they put less onus on borrowers to repay their loans.
