The alternative-finance sector is not a vanity project. Companies such as Lending Club grew out of the failure of mainstream finance to provide credit to small businesses in the wake of the credit crunch of 2008.
Many micro and small businesses suffer as a result of high transaction fees, delayed or late payments, complex financial admin tasks and cash-flow disruption. According to research from the Federation of Small Businesses, 30% of all payments to SMEs are late, at an average value of £6,142. Cognisant of the urgency around late payments the UK government recently announced an overhaul of the Prompt Payment Code (PPC), cutting the payment term in half to within 30 days. Further, McKinsey estimate that around 74% of an SME’s time is spent on ‘non-core activities’, including time-consuming administrative tasks.
With the UK home to approximately 5.5 million micro-business owners, the RTP service is designed to provide them with greater choice, control and a flexible technology that is a more cost-effective alternative than cash, direct debits or high-fee card transactions.
The platform allows users to send secure, real-time payment requests via text, email and Whatsapp, as well as QR codes for simple face-to-face transactions. It ensures that funds are transferred into a chosen account immediately, boosting cash flow. It also generates invoices, streamlines the process of chasing late payments and automates financial admin by integrating with all the major accounting applications.
Historical Performance And IFISA Process Guide
That figure is the result of over £20 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2020/21 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.