It is not just individuals who have been affected by the squeeze on credit. Many small businesses are struggling to attract funding from the traditional outlets of banks and building societies, this is preventing them from expanding, servicing debts and making other essential payments, and in some cases, preventing a business idea from getting off the ground at all.
The good news is, ordinary people can help, and profit in the process, through a new source of lending: ‘crowdfunding’, also known as peer-to-peer lending or peer-to-business lending, depending on whether you are lending to an individual or a business. A growing number of platforms, which are usually online, are connecting individuals attracted by the promise of higher interest rates with businesses and other individuals who might otherwise struggle to raise capital from traditional lenders.
Undoubtedly, for the lenders, this is riskier than putting your money in a savings account, as these companies are not regulated by the FSA and are therefore not protected by the Financial Services Compensation Scheme, but returns on your investment can be up to 8%, compared with current returns on a typical bank savings account of about 3%. But credit checks are carried out on borrowers, and loans are often spread out across different borrowers, so investment is diversified: peer-to-peer companies are committed to keeping risk of default as low as possible, if only to protect their own reputations.
So let’s have a look at some of the key players in this new industry, and what marks them out from their competitors, especially some of the more accessible ones for young people trying to maximise their savings.
Zopa – a peer-to-peer lending platform, and market leader in individual lending, it is widely credited with kickstarting the new wave of alternative lending. Zopa has now brokered over £200 million of loans in its six years of business, and is expected to grow another 50% this year. Offer savers interest rates of 5-8%.
Ratesetter.com – Zopa’s major competitor. Savers can earn up to 4.7% on a fixed-rate bond option. Risk of default is limited, as borrowers must be aged 24 or over, have a good credit history and a regular income.
Funding Circle – this is a peer-to-business broker, since money is lent to small businesses rather than individuals. Average return is currently around 8%, although lenders are charged a 1% annual ‘servicing fee’. Investors can either choose the businesses they want to lend to, or ‘autobid’, whereby their money is spread across a range of companies.
ThinCats – less risk is involved with this peer-to-business lender, as it only offers secured business loans. However, it is perhaps one for those with more disposable income, since the minimum investment available is £1000. Average returns range from 8-11%.
Relendex – this peer-to-peer company aims to provide secured loans for commercial property investors. Each borrower is connected with several lenders, who collectively provide the capital for people looking to earn income on commercial properties. Returns for lenders range from 5% to 12%, and it offers competitive rates for borrowers at higher loans to value.
Squirrl – this peer-to-business company allows would-be investors to bid for investment opportunities in public sector and major listed public companies. Risk is also limited because no saver is allowed to lend more than 5% of the total value of a loan.Returns are from 6-7% on low risk loans and 9-12% for SMEs.
Rebuildingsociety.com – this is another crowd funding platform which connects lenders and borrowers. What sets rebuildingsociety.com apart from other peer-to-peers is that lenders choose how much they want to lend from a series of potential investments and select the interest rate at which they will lend based on the risk levels of the investment. Rebuildingsociety.com also offers ‘Trust Points’, a reward system which awards users points for doing anything from logging into the system, to making an early repayment on a loan. Profits from the website are then given back to investors and entrepreneurs depending upon how many points they have amassed.
So, the companies we have looked at above all deal with funding, but what if you fancy taking a stake in a company? Here are a few equity options:
Seedrs – this company allows investors to back start-ups from as little as £10, although the real beauty in investing in these companies for many is the tax relief available through the ‘Seed Enterprise Investment Scheme’ (SEIS): investors can claim back up to 50% of the money they invest.
Crowdcube – like Seedrs, this gives would-be ‘angels’ a chance to invest in a start-up in exchange for equity in the business. Also like Seedrs, investors are eligible for tax relief – under SEIS and the Enterprise Investment Scheme (EIS). Investors select the company they want to invest in from a series of pitches which are uploaded onto the website.
startups.co.uk – this website offers advice to a range of companies looking to start their own business from scratch.