Has the Funding for Lending scheme caused dwindling interest rates for savers?

funding

Last week, research from Moneyfacts showed that the average cash ISA rate is now 1.74% – a significant and worrying drop from the 2.55% that was on offer a year ago.

A study by Which? reveals that it’s not just ISA rates that have suffered.  What they describe as the “interest rates freefall” has spread across the entire spectrum of savings accounts.

Why the drop?  After all, the Bank of England base rate has been historically low for some time now.

The answer, according to Which? is the Funding for Lending scheme which the Government unveiled back in August 2012 as its solution to the lending crisis that was preventing consumers getting mortgages and businesses from finding the business finance they need to grow their way out of economic uncertainty.

Despite the honorable intentions of the scheme – few would disagree that more business funding is needed – the unintended consequence of the scheme is that banks have cut interest rates on savings accounts because they now no longer have such a pressing need for customer deposits.

The link between savings deposits and lending is too often forgotten when it comes to coverage of the economic problems faced by the UK.  Back in the days of local mutuals, customers hoping for their first mortgage would add their name to a list and only find their application accepted when enough customer deposits – savings – had come in at the other end of the business.

Now it’s a little different, of course, but money still needs to come from somewhere.  Viewed simplistically, banks and building societies have too options when it comes to generating money to lend out to its customers.  They can use the savings deposits they’ve taken from other customers or they can raise “new money” through trading the markets.

Pre credit crunch, most large banks funded a pretty large chunk of their mortgage or small business lending through the latter – with the exception of a few, they certainly didn’t have enough customer deposits to offset the amount they lent.

Then the world changed; banks couldn’t borrow as easily – or cheaply – on the open market, they were asked to re-capitalise and the need to bring deposits and lending values closer together led to a massive scramble for savings customers.

That’s why for so long, savings rates remained far higher than base rate.

Whilst that’s great news for the millions of savers who would otherwise see their money reduced by inflation, it does beg the question of sustainability.

Then came the Funding for Lending scheme that offered banks access to cheap finance to lend on to customers.  Great news… at first.  Except that now, banks aren’t quite so desperate to real in savers and, as a result, interest rates have tumbled.

What does this have to do with crowdlending or P2P Finance?

A lot, actually.

The problem with Government schemes is that they often have unintended consequences.  The decision for Government to lend via some peer lenders could have equally unintended consequences if it leads to reducing rates on the platforms involved.

In short, it’s difficult to fiddle with one bit of an eco-system without huge consequences elsewhere – it’s what gardeners deal with everyday, we just need a bit of common sense applied to the financial eco-system.

What crowdlending offers is not a tweak to the current system but a new system.  That’s why it’s sustainable and that’s why it can offer good value for all – for investors, for borrowers and for the platforms themselves.

Crowd lenders don’t need to hold capital against the loans made as their simply arranging loans, not facilitating them.  Likewise, there are none of the costs of a big banking network to eat into returns or ramp up costs.

Savers can put their money to work (fee free in the case of FundingKnight) and borrowers can access finance generated by real people – not Government schemes or money market trades that are unsustainable at best, risky at worst.

Alternative finance is just that – a real alternative – it’s time to spread the word to investors and keep peer to peer lending going from strength to strength.

The Loan Exchange – A Step by Step Guide

stock exchange

So you have chosen to invest your money into FundingKnight’s peer to business lending scheme. Congratulations!

But now what to do with it?

There are a few choices for the uninitiated to make when investing in FundingKnight loans, such as which company you want to get behind and lend to, how much you want to lend and lastly the method in which you lend.

The first two choices of who and how much are fairly self explanatory but the method of how you lend is an interesting one.

Investors have two choices. You can bid on current new loans where you’ll be bidding in a reverse auction against other investors with the lowest bids – in terms of the interest rate you offer to lend at – being accepted to form the final loan.

The alternative lies in The Loan Exchange. This investment is no longer a live auction but rather, if we look at it in terms of those well known online auctioneers, ebay, a “buy it now” option.

And the process is ridiculously simple. Register as a lender on FundingKnight and deposit an amount of cash that suits you and your investment needs. You are now a bona fide lender and head straight to the my money page. You’re getting close…

   My Money

Now it’s time to choose the business and loan you want to invest in. Head to ‘Find a Loan’ and expand The Loan Exchange option.

You’ll find lots of different loan parts available to choose from.  These are investments that existing FundingKnight lenders already hold but are choosing to sell on, perhaps to release their cash, or perhaps just to spread the investment across more loans ad diversify their portfolio.  Some will be small parts, say £25, others will be much larger, say £1,000 or more.

Choose the loan part you would like to buy.

the loan exchange

Click on ‘Tell Me More’ and everything you need to know about your prospective loan terms, returns, business information, turnovers, financial history and more is there to read in clear, jargon free plain English.

Loan details

And this is where FundingKnight comes into its own: it’s a simple and clear process, user-friendly and quick. Any questions you might have will be answered here but if you need to know more then FK are more than happy to get back to you with further information.

Then one you’ve chosen and done your research (and providing you have enough funds in your account!) it’s a one-click process, just “buy now” and submit. Success! You are now a peer to peer lender!

So why would you want to “buy it now” rather than bid on a loan?

Even to a newbie like me, there are some clear advantages that might make you opt to “buy it now” rather than bidding. Clearly the danger of being outbid is removed and the process is quicker – and we like quick. Also, even if there are aren’t live loans online available to bid on, there will always be loan parts available to purchase on the loan exchange. Sometimes time is of the essence and a one click process is all you have time for.

Another plus point is that it helps you spread your investment and diversify your loans and that keeps it interesting – as well as spreading out your investment to reduce the risk that one bad loan will wipe out the returns on your whole portfolio. It also allows you more flexibility as you are able to invest in past loans that have already come and gone, no matter when you registered as a lender.

The loan exchange also lets you choose shorter term lending periods as some of the loan has already been paid off, leaving less time for the rest of the loan to run. This allows your money to go in and out faster than it might if you bid on a current loan.

Sometimes, it might even be cheaper. Because the investor selling may want quick access to their cash, they might offer it at a discount and everyone loves a bargain right?

And for those who may be slightly impatient (and I count myself in this!) you won’t have to wait around for your cash to start earning interest. No need to wait, get involved straightaway and start to see some returns as soon as possible.

You can find out more about becoming a FundingKnight lender here or click on the Katie’s crowdlending journey to find out more about my adventures in peer to peer finance.

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Straight from an investor’s mouth… the crowdlending experiences of one FundingKnight lender

customer satisfaction

Steve Lee is the MD of Jumbocruiser Ltd., the largest British owned luxury sleeper coach operator in Europe.  As he gets closer to retirement, he’s looking for ways to invest his spare cash effectively.

Since summer 2012, Steve has been actively participating in peer to peer lending using a variety of P2P / P2B platforms to invest funds on behalf of himself, his company Jumbocruiser Ltd., the Jumbocruiser Retirement Benefits Scheme (where allowed) and Spenion Unlimited.

Steve has recently become an active FundingKnight lender and has kindly agreed to share, in his own words, some of his thoughts about crowdlending:

FK:  When did you first start experimenting with peer to peer finance?

Steve:  Summer 2012

FK:  Other than FundingKnight, which websites do you use regularly?

Steve:  Funding Circle, Marketinvoice, Thincats.  I also have interests in Zopa and Ratesetter that I am running down.

FK:  You’ve recently started lending through FundingKnight, a relative newcomer in the P2P space.  What do you need to see from a new entrant before you are willing to invest?

Steve:  I always look up the company history and look at the track record of the people behind the company and do a bit of research in the same way I might if investing in shares or loans on other platforms.  When it comes to loans on the platforms, I am slowly learning to use common sense as well.  On one platform I bid £5,000 on a company that was set up just to do a major conference with global speakers (i.e. Bill Clinton) designed for budding entrepreneurs.  This was before I looked at the project carefully.  On reflection I realised I should never have placed the bid as the opportunity was fraught with danger – who was going to cough up £250 to hear people with no entrepreneurial skills like Bill Clinton speak?  I am more careful now and as a minimum I get a credit rating and require a track record of the people involved and even then spread myself out thinner initially.

FK:  Why does P2P finance appeal to you?  Is it solely about the return on investment or does helping small businesses / getting more involved in actively managing your money matter too?

Steve:  I have to apologise but despite being a former hippy activist, I do not do it for the kharma but merely due to the fact that I need to invest my spare cash effectively before I retire.  I believe there is a short term window of opportunity until the government and banks get their acts together where I can overall hit around the 10% return mark before tax and I am taking advantage of it.

FK:  Are there benefits to be had from dealing with smaller companies like P2P lenders rather than big, mainstream banks?

Steve:  It depends on (a) rates and (b) security required when lending to profitable businesses.  For new businesses P2P will probably remain the ONLY way to get capital invested.  There are many lenders out there who will do auto-lending, so those loans will be covered once they get past the platform’s own initial evaluation for loan acceptance. Nearly all my failed loans (on other platforms) were auto-lent so I no longer do that but some people just do not have the time to mess around so I still see a value in auto-bidding for the lenders and the platforms and the borrowers.

FK:  Are there any FundingKnight features you particularly like?

Steve:  I’m impressed with the way that the loan exchange works, letting you buy and sell loan parts.  Say I have £500 to bid, I often want to do 5 x £100 bids at the same interest rate.  On most sites I have to do it manually five times and keep scrolling to the bid rate which on a tablet or phone is not easy.

FundingKnight allows you to split up an investment and only sell part of it on the loan exchange, giving you the option to state exactly how much you want to sell at any one time.  In my opinion that makes it a superb solution, the best one available on any of the platforms I’ve used.

FK:  What would you say to potential investors wondering whether to try P2P Finance?

Steve:  Spread your loans thinly.  Look at who you are lending to.  Feel comfortable about the lending platform that you will initially be sending your money to.  Do not be greedy and bid a lot on loans which have high interest rates but carry a bigger risk.  Subscribe to a database like Company Check and if things look to be going downhill, do not delay selling on a secondary market (loan exchange) even if you are getting a high rate of return.

It is quite difficult to lend out a lot of money quickly so use a site with a secondary market (loan exchange) and accept lower rates for now so you all get all your money lent out and then slowly sell the loan parts when rates are higher elsewhere.  It is a juggling act but it can be done.

FK:  Thank you Steve, we really appreciate you taking the time to share your thoughts with the FundingKnight blog.  Good luck with your crowdlending investments in the future.

Note: The answers above represent Steve’s own personal views and opinion and in no way constitute advice.

More about Steve:

Steve Lee is MD of Jumbocruiser Ltd, one of Europe’s leading sleeper coach companies with coaches from 8 to 16 passengers.  If you are interested in finding out more, please use the online quote form to get in touch.

New crowdlending opportunity: Secure Archive Solutions Ltd.

SAS Ltd logoA new investment opportunity is now live on our website for all registered lenders to bid on.  If you’re already registered with FundingKnight you can log straight into the website to read all about the loan opportunity, review the financial information and, if you wish, place a bid.  If you’re new to crowdlending or not yet signed up with FundingKnight simply go to www.fundingknight.com to sign up as a lender.  You can start investing with £25 and we charge no fees for taking part in a loan.Whilst it’s early for us to predict rate which potential lenders will achieve, our first auction-based loan provided lenders on average with a rate of 9.98% p.a.

New borrower: Secure Archive Solutions Limited

Amount: £50,000

Period: 2 years

Auction duration: 14 days

Based in Altrincham, Cheshire, Secure Archive Systems provides document storage and archive facilities, offering bespoke solutions in the document management service sector, with a turnover of over £400,000 in the last financial year.It needs the funds to extend its storage capability, installing racking in its newly acquired warehouse, building an extension to its vault, and upgrading its IT.

Once registered, you can find more details by logging on to www.fundingknight.com and choosing Find a Loan.

 

Crowdfunding accountants: Invest in abacus Franchising

abacus franchising logo

New loans are now live on the FundingKnight website, offering the chance to start investing in abacus Franchising.

Abacus is a national network of qualified accountants, supporting small businesses in all aspects of accountancy and taxation.

There are two separate auctions providing a chance to invest in British business:

1 – year loan of £20,000

3 – year loan of £30,000

Each loan will be crowdfunded, using the FundingKnight investment community to attract investors.

You can start investing with as little as £25 and peer to peer lending is fee free with FundingKnight.

To lend to British business you need to register as a FundingKnight investor.  Once that’s done, you simply log onto www.fundingknight.com and choose Find a Loan to start investing.

You decide what to invest in, you decide the rate that you want to bid and you have the chance to access your cash whenever you need it by selling or all or part of your investment to a new lender via the FundingKnight loan exchange.

Read about the abacus loans below, or for full financial analysis and information log onto the FundingKnight website.

Business seeking funding: abacus Franchising Company Limited

Loan 1:

Amount: £20,000

Period:  1 year, repayable in 12 installments

Loan 2:

Amount: £30,000

Period:  3 years, with a 3 month repayment holiday

Auction duration:

Fast track auction of up to 14 days, to close when both loans have been filled at the reserve interest rate.

Reason for loan:

Expansion, following new contract awarded by Scania GB.

Business background:

Incorporated in 2004, abacus has developed a national network of qualified accountants who support SME businesses with all aspects of accountancy, taxation and administration functions.  The network has over 3,000 clients. Its collective fee income would make it one of the top 100 accountancy firms in the UK. Abacus is the only national accountancy franchise for qualified accountants approved by the British Franchise Association.

The loan is to provide finance to support the expansion of the business following an award of a new alliance with Scania GB to provide services to its customers.

Find out more, or search for new loan opportunities by registering as an investor with FundingKnight.

Peer to peer loan descriptions: What’s in a name?

analysis

I’m an avid reader of the Lend Academy blog by Peter Renton, in fact, I recently reviewed his book about Lending Club, The Lending Club Story on the Funding Knight blog.

One of the reasons I love Lend Academy is the amount of information and analysis on offer for P2P enthusiasts.  Yes, it’s focused on the US market but it never fails to get me thinking…

This week, it’s the a guest post called Loan Descriptions – Can They Be Helpful When Choosing Loans? that has caught my eye.  Written by Sam Kramer, a financial sector old-timer and keen P2P investor (You can find him on Twitter @P2P_CT), the post delves into historical data to investigate whether the loan description that introduces a P2P loan is at all predictive of its eventual repayment rate i.e. can you predict which loans will default simply by reading their name?

Well, I won’t let all of the results out of the bag, you should head over to Lend Academy to read the full post for that (and subscribe since this is just the opener in a 2 -part guest slot) but here’s a taster to whet your appetite.

chart tracking default rate by loan description length

Default rate by loan description length

Top level analysis: Very short loan descriptions (between 1 and 10 characters) have a reasonably high default rate.  (Note, interestingly, no-description loans have a lower-than-average default rate, as do short loan descriptions of 11 – 350 characters).

The post goes on to look at the impact of longer descriptions as well as drawing attention the the impact that recency of loans will have – if no-description loans are a relatively new thing, then logic says they’ll have a lower default rate since less of them will have grown to maturity.

This latter point is relevant for virtually every piece of analysis you’ll see about peer to peer lending as the whole industry is so young.  Finding a way to compare default rates of very young ‘unseasoned’ loan books with the much more mature lending portfolios of mainstream banks could throw up some interesting analysis… any volunteers?

Rothschild backs peer to peer lending as new meets old

old leaf on new grass

Following Friday’s news that peer to peer lending, including peer to business lending  is set to be regulated by the FCA (the regulator about to replace the FSA), the industry has received a further boost with news that RIT Capital Partners, Lord Rothschild’s London-listed investment trust has invested in Zopa, the UK’s first peer to peer lender who started the alternative finance wheels in motion back in 2005.

It’s a move which will inevitably prompt a whole host of “old meets new” clichés as one of the most famous bastion’s of banking joins forces with a disruptive player on the alternative finance circuit.

Speaking to the Financial Times, Lord Rothschild said,

“We are witnessing the growth of the non-banking lending market.  Following the 2008 crisis many of the banks remain under capitalised.  In these circumstances alternative forms of credit will be developed on a significant scale.  This is happening.”

UK peer to peer lending enthusiasts will no doubt watch to see whether the involvement of such an internationally renowned name does for Zopa what the arrival of John Mack did for Lending Club.

Lending Club have now processed over $1bn of loans in the US and their success has often be credited, in part, to the fact that they managed to engage the support of a recognised industry chief who could bring Lending Club the gravitas it needed to go mainstream.

Although Lord Rothschild left his family bank three decades ago, his name remains synonymous with what was once the globe’s most impressive banking group.  The decision of RIT Capital Partners to invest in Zopa will surely be seen as a rubberstamp for an industry which is rapidly growing from a small stream of niche financing into a genuine alternative to mainstream banking.

Our next online peer to business lending auction: LeisureBench Ltd.

online auction

We are pleased to announce that the next online auction has just gone live on the FundingKnight peer to peer lending website

This time we’re offering our registered lenders the chance to invest in LeisureBench Ltd.  LeisureBench were our first loan customers and have already successfully paid off their first loan.  We are delighted that we can now offer them the benefit of a full live auction process.

You can read more about the investment opportunity below and, if you haven’t already registered as a lender, please do take the time to sign up as a peer to business lender with FundingKnight.  You never know when an opportunity might pop up that’s just too hard to resist…

Business looking for funding: LeisureBench Ltd.

Amount: £50,000

Period: 9 months, with 4 month repayment holiday

Auction duration: 13 days

Reason for loan: Stock purchase – Garden Furniture

Business background:

Established in 2004 as a specialist furniture supplier and garden furniture retailer, LeisureBench has built a niche in importing outdoor furniture and buildings for the commercial sector, particularly the pub and public sectors.

LeisureBench is a fast growing dynamic company able to adapt quickly and efficiently to new trends and markets.  As direct importers with partners in China, Indonesia, Vietnam and Bulgaria, LeisureBench develops its own unique product ranges at very low cost price enabling them to compete at every level.

We lent £110,000 to LeisureBench in January this year, which has been fully repaid. This is the second of three loans we are arranging for LeisureBench to fund stock purchases for the 2013 season.

Add funds to your account:

You will need to allocate the appropriate funds to your account to complete your investment. Log on to FundingKnight and go to Add Funds in your My Money account. Remember you can invest as little as £25.

Bid now

Once funds have been applied to your account (It typically takes 24 hours for the bank to transfer the money) simply go to Find a Loan to find further information on the business and the loan opportunity and to make a bid.


Who does FundingKnight lend to?

As a complete beginner to the world of finance and loans, I am going back to basics again with this post. I want to get right to the very core of what FundingKnight can offer businesses looking for a loan.

Looking at the FundingKnight website, it seems like a very straightforward process but in my mind there must be huge amounts of criteria that you would need to meet before even beginning to think about applying let alone the actual paperwork that organising a business loan must entail.

I am endeavouring to find out more, so I asked FundingKnight a few questions about what their basic principles were behind their lending offer.

FK: We specify the following three points for companies looking to borrow money from us:

  • The business must have at least two years trading history
  • They must be limited companies registered at companies house
  • And finally, they must be UK based businesses with a UK bank account

KK: It all sounds pretty reasonable to me and extremely straightforward, but there must be more things to consider beyond approaching FundingKnight as a legitimate business enterprise? Surely you would want to ensure that you are investing in something that is a sound prospect with a solid financial future? As otherwise couldn’t any old debt ridden business be able to approach yourselves in dire straits?

FK: Yes, that’s completely true, lenders come to FundingKnight to get a good financial return and in our approach, there are three key things we look for and to balance applications against, ensuring we lend to the right companies:

  • Is your business well managed?
  • Are you realistic about risk?
  • Will your business generate enough cash to repay our lenders?

KK: Ah ok, that’s more like it – still, it seems very simple and straightforward and basically clear, common sense which has got to be a good thing.

FK: Yes, we think so and we want to make the process as clear and easy as possible as after all, we want to lend money in the same way that businesses wish to borrow money. It’s a win-win situation!

Many of our lenders also want to give the economy a boost and no doubt as FundingKnight grows many will also use it to lend locally but first and foremost people expect a sound return on their money so it’s important to have some good ground rules governing who can apply.

KK: So you don’t offer loans to start-ups?

FK: No we don’t. That’s not intended to suggest that start-ups aren’t a good investment – some are – it’s just that they typically need a different type of funding and benefit from a different type of investor.

KK: Excellent work. Thanks to FundingKnight for idiot friendly responses and I hope that my ignorance will help other people get involved and take advantage of the clear benefits that FundingKnight offer.

An introduction to peer to business lending – part 1

introducing...

FundingKnight is delighted to be spreading the crowdlending message over at Smart Accountancy Systems blog this week.

Peer to business lending (P2B), also known as crowdlending, crowdfunding or peer to peer lending is a relatively new way for businesses to access funding and business loans.

Put simply, a business applies to borrow some money via a P2B website or online marketplace.  Their application is credit checked and analysed and, if successful, offered up to the general public using a P2B Lending platform to share details of the loans on offer.

Everyday savers and investors bid to participate in loans, each contributing as much or as little as they choose, so that one business loan is made up of lots and lots of little loans from individual savers.

Businesses benefit from a new source of business finance and savers get a chance to make their money work harder.

So how exactly does peer to business lending work?  Where did it start and what are the key things to be aware of?

Continue reading the full post at Smart Accountancy Systems.