The in­ter­net has opened up a whole new world for in­vestors

Yorkshire Post - - MONEY -

A WHOLE new fi­nan­cial field has been opened through the in­ter­net. En­trepreneurs have by­passed tra­di­tional sources of fund­ing to seek pri­vate and in­sti­tu­tional back­ing for their projects.

Many ideas are wor­thy of the pop­u­lar TV se­ries, Yet in­stead of just four or five back­ers, in­ven­tors seek many sup­port­ers to en­sure suf­fi­cient fi­nance. The prospect for the in­vestor is ex­cit­ing as their money could be at the birth of a great idea which will pay hand­somely.

Yet it is also one of the riski­est ways to save. It is im­por­tant to re­mem­ber that such lend­ing is an in­vest­ment and not a sav­ings ac­count.

Whilst ISA funds, known as ‘In­no­va­tive’, can be ap­proved by the reg­u­la­tor, any money in­vested is not pro­tected by the Fi­nan­cial Ser­vices Com­pen­sa­tion Scheme. “This lack of pro­tec­tion means th­ese in­vest­ments are un­suit­able for those look­ing for se­cu­rity. Those who want safety should usu­ally fo­cus on cash hold­ings which are pro­tected by the FSCS or NS&I prod­ucts pro­tected by the Gov­ern­ment,” ad­vises Chase de Vere, part of the Swiss Life Group.

How­ever, some sites have in­tro­duced con­tin­gency or pro­vi­sion funds to pay out in the event of a de­fault.

Like any ISA, HMRC al­lows up to £20,000 to be in­vested each tax year which means no cap­i­tal gains or in­come taxes are li­able.

Some of those seek­ing help are in­di­vid­u­als and oth­ers al­ready small firms.

It is es­ti­mated that around 150,000 have ad­vanced al­most £10bn, en­joy­ing an av­er­age 4.6 per cent in­ter­est. This is a net re­turn af­ter tak­ing fees and bad debts into ac­count.

The scheme is known ei­ther as crowd­fund­ing or peer-topeer (PTP) lend­ing with projects ad­ver­tised on in­ter­net plat­forms run by the likes of Fund­ing Cir­cle, Land­bay, Rateset­ter and Zopa. Many in­vestors are at­tracted by fi­nan­cial tech­nol­ogy, such as In­dex Ven­tures, an An­glo-Amer­i­can ven­ture cap­i­tal com­pany.

Each plat­form vets prospec­tive busi­nesses, em­ploy­ing credit of­fi­cers who as­sess new ap­pli­ca­tions and price a loan ac­cord­ingly.

Like Face­book and Google, the greater in­for­ma­tion it ob­tains, the more ac­cu­rately it can judge its rates, tak­ing a com­mis­sion on each loan. Such plat­forms do not lend on their bal­ance sheet and so are not con­strained in the way a tra­di­tional bank op­er­ates.

To date, the sec­tor has been only lightly reg­u­lated and the Fi­nan­cial Con­duct Au­thor­ity is wor­ried that those who have se­cured fi­nance are not in a good po­si­tion if there should be ei­ther higher in­ter­est rates or a ma­jor eco­nomic down­turn. There is lit­tle trans­parency re­gard­ing credit risk.

Savers though do not have to watch slight changes in Bank of Eng­land rates as the loans are not di­rectly af­fected. In­stead, such fluc­tu­a­tions are just one con­sid­er­a­tion which af­fect PTP rates with plat­form de­mand, bad debt and busi­ness trends more sig­nif­i­cant.

Al­ready there has been a ma­jor fail­ure. The Manch­ester-based lender, Col­lat­eral UK, was forced into ad­min­is­tra­tion in Fe­bru­ary. It had promised re­turns around 12 per cent.

Although it had been loaned £21m, it did not have FCA ap­proval for its op­er­a­tions.

In July the FCA sug­gested new rules to re­quire plat­forms to ex­plain how they se­lect clients and pro­tect savers, as well as to spell out the full charges and lev­els of risk in­volved.

Eight years ago, one of to­day’s ma­jor PTP lenders, Fund­ing Cir­cle, was founded by three Ox­ford grad­u­ates above a waf­fle shop. It has lent some £5bn. To show the cur­rent buoy­ancy, over £1bn of this was lent in the first six months of this year.

Fol­low­ing sales in 2017 of £94.5m, up 86 per cent on the pre­vi­ous year, the plat­form floated on the stock mar­ket in Septem­ber, rais­ing £1.5bn, although some bro­kers ex­pressed con­cern over the high float price sought.

It was val­ued at al­most 16 times last year’s rev­enues whilst its ma­jor US ri­vals – Lend­ing Club and On Deck – are less than twice. It ex­pected many of its 80,000 in­vestors who use its plat­form to pur­chase shares.

The money raised is to both ex­pand mar­ket­ing – where over 40 per cent is spent on tele­vi­sion ad­ver­tis­ing – to at­tract new lenders and to de­velop for­eign mar­kets, no­tably Ger­many, the Nether­lands and US. Lon­don was keen to list the firm to at­tract more fi­nan­cial tech­nol­ogy com­pa­nies in­clud­ing the chal­lenger banks Monzo and Revo­lut.

Crowd­fund­ing money can be placed in two tax-ef­fi­cient ve­hi­cles: an En­ter­prise In­vest­ment Scheme (or EIS) and Seed EIS.

Each brings in­come tax ben­e­fits with 30 per cent for the first and 50 per cent for the lat­ter. Both have ex­emp­tions from cap­i­tal gains tax to re­flect the risk fac­tor.

One re­cent York­shire crowd­fund­ing suc­cess is North­ern Bloc which raised £500,000 in one week to ex­pand its ve­gan ice-cream busi­ness.

In three years, the firm has in­creased out­put from one to 20 tonnes a week. Based at a for­mer tex­tile mill in Leeds, it now sup­plies the Co-op, Ocado, Sel­fridges and Waitrose.

It chose this route for new fi­nance to en­cour­age in­vestors to en­gage with its brand and help to push the busi­ness for­ward. It has at­tracted 250 money an­gels.

To take a profit, apart from the pos­si­bil­ity of a div­i­dend, a busi­ness has to have a buy­out or pub­lic flota­tion. In­vestors who backed craft brewer Brew Dog in 2010 had the op­por­tu­nity sell up to 15 per cent of their shares last year. The firm says the re­turn was 2,800 per cent.

Since savers may to wait some years to re­alise their cash, quoted an­nual re­turns are mis­lead­ing.

Watch, too, for the class of share on of­fer. Savers need to en­sure they are not dis­en­fran­chised by ac­quir­ing non-vot­ing stock.

ISA rates of re­turn vary enor­mously. Lon­don Cap­i­tal & Fi­nance, founded in 2012, has an 8.95 per cent tar­get for a five-year loan whilst six per cent is sug­gested by both Lend­ingCrowdGrowth and RateSet­ter over one to three years and five years re­spec­tively. This year easyMoney be­came a PTP provider. It has a £10,000 min­i­mum for its ISA which it ex­pects to re­turn up to 7.28 per cent and with no stip­u­lated loan pe­riod.

Sim­i­larly high rates are quoted for a min­i­mum £1,000 by both Cap­i­tal Rise (10-14 per cent) and Prop­erty Crowd (7-10 per cent). The loan pe­ri­ods are vari­able with the first and an es­ti­mated four to twelve years with the lat­ter.

Lend­ing works, which started four years ago, has a tar­get 8.7 per cent (min­i­mum £25) but loans through Land­lordIn­vest can reach 12 per cent as the money pro­vides buy-to-let prop­erty loans.

PTP has flour­ished through years of low yield, al­low­ing in­no­va­tive ideas to reach the mar­ket­place.

Derisory sav­ings rates have en­cour­aged more in­vestors to seek this new route. How­ever, savvy ad­vis­ers say the risks in­volved mean only the most hardy should spare more than their loose change.

Conal Gre­gory is AIC Re­gional Jour­nal­ist of the Year.

York­shire based Northen Bloc is a crowd­fund­ing suc­cess story.

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