How peers can solve borrowing headaches

Lending without the middleman is booming, report Chiara Cavaglieri and Julian Knight

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The Independent Online

Small businesses need cash to invest or simply to keep their heads above water, while Britain's army of hard-pressed savers understandably crave better returns. That's the raison d'etre behind the latest peer-to-business lender launch. Massow's Angels, named after the founder; Tory entrepreneur Ivan Massow, is the new player in what is becoming a growth lending market.

Mr Massow claims his new site and that of the established offer business borrowers and individual lenders a better deal than the banks. "It's what the internet was meant to be; egalitarian, fair, transparent. For the people, by the people. It literally cuts out the fat cats," says Mr Massow.

Funding Circle recently reported that its customers invested £6.1m in the first two months of this year and the total amount saved and borrowed at Zopa, the UK's first peer-to-peer website, passed the £200m mark last week. Such growth prompted Andy Haldane, the head of policy at the Bank of England, to say that such peer-to-peer lenders could ultimately replace high street banks.

The premise behind such social lending is to cut out the middleman by matching lenders and borrowers directly, and to mutual benefit. So, borrowers can bypass reluctant banks and access lower interest rates and investors beat the paltry high street returns.

Funding Circle says the average return for someone investing in its site is 8.3 per cent, twice as high as the best-buy cash individual savings account. "A lot of people are starting to realise that bank rates aren't increasing. Also what do they do to keep up with inflation? There aren't many options out there but peer-to-peer lending is one of them," says James Meekings, the co-founder of Funding Circle.

While Zopa is for individual borrowers, Funding Circle and Massow's Angels offer loans to small UK businesses so there is something of a feel-good factor in supporting British enterprises too. Massow's Angels' lenders are free to pick the business proposals that they like the sound of and decide how much they want to lend to each one (minimum £100).

Alternatively, the autobidder tool automatically makes offers on their behalf within set parameters. Similarly, at Funding Circle individual lenders can open an account with as little as £20 although they recommend spreading loans across 20 companies to minimise the risk of default.

Although closely modelled on Funding Circle, one difference is that Massow's Angels is fee-free for lenders (borrowers pay 1.2 per cent plus a £50 application and £50 listing fee). In contrast, Funding Circle takes a 1 per cent annual servicing fee and charges 0.25 per cent if lenders sell a loan part.

Massow's Angels will assign a risk banding to the business asking for money. The higher the risk banding, the more expensive the loan will be. For example, risk band A+ will see loan costs of between 6 to 7 per cent, while firms put into risk band B will face charges of between 9.5 per cent and 10.5 per cent.

With any lending site prospective lenders must consider the measures in place to tackle defaults. All borrowers should go through some form of underwriting process as they would with a bank before being accepted. At Funding Circle, for example, every business listed has at least two years' trading history, a healthy credit report and directors have passed through identity and fraud checking systems.

Massow's Angels and peer-to-peer lender RateSetter offer compensation funds to cover defaults which could appease some lenders, charges vary from 0.5 per cent to 4 per cent of the amount lent, the higher the risk rating of the borrower the more expensive the compensation fund premium. Funding Circle is also backed by Link Financial, who would take over loan contracts if it were to cease to trade.

However, the firms are not covered by the Financial Services Authority. There is a self-regulating trade body, the Peer to Peer Finance Association, but only Zopa, RateSetter and Funding Circle have signed up. Crucially, peer-to-peer is not under the remit of the Financial Services Compensation Scheme so there is a risk lenders could lose their money if the borrower goes bust. "As with other social lending the key risk is of default and savers must not confuse one of these lending sites for a standard bank or building society deposit," says Danny Cox from IFA Hargreaves Lansdown.

Although across peer-to-peer sites default rates are quite impressive (Zopa estimates less than 0.5 per cent of customers have lost money due to bad debt since its launch), it is important to keep in mind that borrowers are under increasing pressure. "This industry is in its relative infancy. Savers and investors should not risk money they cannot afford to lose and should limit their exposure to no more than say 5 or 10 per cent of their liquid portfolio," says Mr Cox.

Peer-to-peer players

Zopa: Peer-to-Peer

Rates for lenders 7.1 per cent

Lenders charged 1 per cent and an additional 1 per cent to cash in early

Lend from £10

Member of the Peer-to-Peer Finance Association


Funding Circle: Peer-to-Business

Rates for lenders 8.4 per cent

Lenders charged 1 per cent and 0.25 per cent on loan parts to cash in early

Lend from £20

Member of the Peer-to-Peer Finance Association


ThinCats: Peer-to-Business

Rates for lenders 10.44 per cent

No charges for lenders

Lend from £1,000

Not a member of the Peer-to-Peer Finance Association


Ratesetter: Peer-to-Peer

Rates for lenders between 4 per cent and 7.5 per cent

Lenders charged 10 per cent of the interest received

Lend from £10

Member of the Peer-to-Peer Finance Association


Massow's Angels: Peer-to-Business

Rates for lenders between 6 per cent and 10.5 per cent

No charges for lenders

Lend from £100

Not a member of the Peer-to-Peer Finance Association

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