By Andrew Watkin, partner, UK200Group member firm Baker Watkin
Peer-to-peer lending is gaining momentum in the marketplace. It is estimated on www.p2pmoney.co.uk that peer-to-peer lenders have given out more than £337 million in loans to date.
Investors are trying to get a decent rate for their money and borrowers are looking for alternatives to bank finance. They have been increasingly filling the gap for both these groups over the past few years, and can bring together potential lenders and borrowers via their websites, offering terms that often beat what banks can offer.
For investors lending the money, this can mean a return on their cash of anything between 3% and 10% and sometimes more.
Peer-to-peer lenders can offer better interest rates than banks because they take less of a cut. This is because they are typically online businesses, with fewer overheads than banks and building societies, which have High Street branches.
In the short term, they are going to be the way forward. Companies such as Zopa and Rate Setter are currently regulated by the Office of Fair Trading under the Consumer Credit Act, and some ring-fence your loan money in accounts they do not have recourse to.
Others are not covered by the Financial Services Compensation Scheme and are seeking FSA approval.
From an investor’s point of view, there is an argument that says that bonds, which can be held in ISAs or SIPPs mitigating income tax, could be a more preferable route, particularly those that offer high yields of between 5% and 9% for those that have an appetite for such risk and do not favour peer-to-peer lending. While there are no large failures on the peer-to peer lending platforms, it is likely that their popularity will increase.
However, I had heard reports that regulation is expected to be introduced in 2014. In America, for example, there is a Bill going through Congress which will limit the amount raised to $1 million, with a single investor not investing more than $10,000 or no more than 10% of their annual income. It is likely that these issues will be addressed in the UK.
With start-up companies, such as SEEDRS, there is probably little due diligence that can be carried out since these are start-ups and there is no track record, proof of product or proof of market.
On the other hand, crowd funding only takes in sophisticated investors and high net worth individuals. They do want to work in parallel with venture capitalists but, in my view, the venture capitalist would only want a few people to be in partnership with and, in effect, would look for the crowd funders to have one share certificate and one point of contact, in effect a single angel.
Crowd funders do undertake a lot of due diligence and to minimise risk may take security, such as personal guarantees from directors or major shareholders for loans under £100,000.
The biggest peer-to-peer lending sites include Zopa, Funding Circle, Rate Setter and Yes-Secure. Zopa, launched in 2005, had its busiest month in November, approving loans worth £9 million — up 50% year-on-year. However, one rival, Quackle, collapsed last year after failing to attract sufficient investors.
It is my view that peer-to-peer lending will help small and medium enterprises but, again, those businesses of a more mature nature will have to have a viable business plan in order to gain the funds and particularly as regulations come in, this may be more and more difficult.
It is likely that an exit route for some of the peer-to-peer lenders would be via the banks since, if they can prove that this business model works, the banks will have difficulty in not adopting a similar model.
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