One of the recurring themes of the alternative finance sector is the difficulty it has had in making a connection with small- and medium-sized enterprises (SMEs). Yesterday, we brought you news of self-funding by many in the sector. Today, we offer an excerpt from a This is Money report on the limited success of the Bank Referral Scheme, whereby SMEs rejected for funding by mainstream banks are referred to lending platforms. It looks like a gift-wrapped opportunity, but the take-up is less than impressive.
A scheme to help small businesses turned down by banks borrow from peer-to-peer and alternative finance firms has proved ‘underwhelming’ and needs an overhaul, say experts.
The Government-backed Bank Referral Scheme was launched in November 2016 and requires the UK’s biggest banks to refer small and medium-sized businesses they turn down for finance to a platform, to help facilitate alternative funding.
But just 1,695 deals were completed between launch and summer last year, compared to 30,000 businesses turned down for funding by banks, latest figures from a HM Treasury review show.
Yes You Can, rated B, for £30,000 with an 11 per cent fixed yield over five years, is now filled. Project Rhapsody rated A+, with an 8 per cent fixed yield for three years is also filled. More loan offerings will land on site soon.
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 2019/20 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.