However, it’s not clear how the structure would stand up in the event of an economic downturn. Unlike in equities, you can’t simply pick up the telephone and ask for your investment (or what’s left of it) to be returned. Schemes are not covered by the Financial Services Compensation Scheme, but peer-to-peer lending is regulated by the Financial Conduct Authority.
This certainly pushes risk well up on the agenda, but ArchOver says it has covered these bases with a belt and braces approach. Perhaps the key factor is insurance. The company only entertains loan applications from companies that historically have strong Accounts Receivables. And once a loan is advanced the ARs are insured, underwritten by global insurance firms. This introduces a further level of scrutiny as the insurers will carry out extra due diligence on the borrower.
Another safeguard comes with the amount of money that companies can borrow. ArchOver will only forward up to 80 per cent of the value of the ARs, and once the loan is made ARs must be maintained at 125 per cent of the loan. These are monitored on a monthly basis. In addition, ArchOver registers a First Floating Charge at Companies House on the borrowers ARs. If a borrower defaults, the ARs are collected.
The need for insurance serves not only to add a further measure of security but guards against the implications that arise from the fact that, in some cases, unpaid invoices can represent up to 30 per cent of a company’s assets. Credit insurance protects a business from non-payment of commercial debt, and makes management of accounts receivable that much safer.
Companies looking to raise money through the lending platform must have at least two years of trading history, and lending becomes a non-starter if the company fails to pass the tests put in place by the credit insurer. The cost of that insurance is paid for by the borrower, and for the lender there are no fees or commission costs. Further security comes from ArchOver’s position as loss payee. Assuming that the monthly credit checks are in order, in the case where borrower invoices are not paid when, for example, the borrower hits financial difficulties, the credit insurer will pay up within seven days, and the money goes directly to ArchOver. It also has access to the monthly health check that lenders are obliged to provide for the credit insurer.
Now for the numbers. Loans are usually made for 24 months, with a maximum of 36 months, and ArchOver aims to pay interest to the lender of around 6.5 per cent. In the event of a change in circumstances where the lender wishes to withdraw the investment, a secondary platform run by Asset Match places the loan up for auction. There is a 1 per cent commission charge to the lender, and given that the loan is still running and paying interest, historically lenders have recouped almost all of the original loan (in the latest case, £4,950 out of a £5,000 loan).
ArchOver is backed by Hampden, one of the largest companies that no-one has ever heard of, but is in fact Lloyd’s of London’s largest managing agent. It invests directly into ArchOver and also on the ArchOver platform.
ArchOver’s secured and insured proposition provides a breath of fresh air in the P2P sector. No investments are risk free, but the company’s business model goes a long way to meeting and answering the more immediate risk questions in what remains a young but fast growing sector.
