Major banks still have serious legacy issues relating to loans made before the financial crash, and have been subjected to a rigorous reappraisal by the financial regulators. The consequences are bad news for small business because many lenders have pulled up the drawbridge on making fresh funds available. Not surprisingly, such voids are now being filled by a range of innovative finance packages that effectively bring the lender and the borrower together without involving the banks.
One of the key methods of bringing the two sides together is through peer-to-peer (P2P) lending, where unrelated individuals and institutions use a platform to provide funds for companies looking to raise finance. The popularity of lending funds in such a way is that the returns are much better than are available through conventional savings tools, typically between 5 per cent and 10 per cent. And more and more lenders are putting up funds. P2P lending in 2014 was around £1bn, but this is expected to reach £45bn in the next 10 years.
One such company offering a trading platform, specialising in real estate, is Proplend. There will always be a risk element, but Proplend has gone a long way to addressing some of the most obvious concerns. A company seeking to raise finance is subject to an internal due diligence process, and all loans must be secured on an asset. The quality of this asset, an existing property is the normal security, is valued independently by a RICS qualified professional valuer, and the quality of the rental income is a key consideration.
Every loan is supported with a 1st legal charge over income producing commercial property, and in some cases personal guarantees and debentures may also be included as an added precaution. A further safety net comes from the loan-to-value ratio, which never exceeds 75 per cent. Proplend also maintains a reserve account, so if a borrower misses a payment, lenders are paid their monthly interest payment. On missing the second repayment, the same applies but Proplend also initiates proceedings to sell the security. So even with a discounted sale price, this has to be less than 75 per cent of the valuation before lenders incur a loss.
There are usually three loan tranches, offering higher rates to reflect higher risk. Typically, a loan of £750,000 secured on a £1m asset, will be charged at 6.5 per cent. For lenders, a rate of 5.5 per cent is paid on the first 50 per cent of the loan; 7.5 per cent on the next 15 per cent and 10 per cent on the remaining 10 per cent of the loan. This allows lenders with different risk profiles and return requirements to all participate in the same loan. A number of pension funds and other institutions are already making funds available, but individuals can take part with as little as £5,000.
All P2P platforms have been regulated by the FCA since April this year, but loans are not covered by the financial compensation scheme that applies to bank deposits. Loans are usually made for 36 months or less, but borrowers can withdraw funds before that, as Proplend operates a secondary market. Proplend charges a 2 per cent commission on borrowers and a 10 per cent service charge is paid by the lenders on interest they receive. A further attraction is that P2P loans may at some point become eligible to form part of an Isa, although this has still to be confirmed.
