Michael Lynn is a qualified chartered accountant with 47 years’ experience and the chief executive of Relendex, which he founded in 2013. This FCA authorised peer-to-peer platform brings together lenders to fund loans secured on UK commercial property.
In recent years, technological advancement coupled with the changing face of the UK economic investment arena has resulted in people considering other forms of investment options.
However, many shy away from putting their money into stocks and shares as they feel they are heading into the unknown with no protection if the market drops.
Worth a look: Peer to Peer lending offers an alternative for investing, particularly in the property space
Peer-to-Peer lending offers an alternative, particularly in the property space, as a viable, high return option that offers a good level of security for their funds.
Loans secured on property also have other borrower guarantees, whilst providing the finance needed to build and refurbish the homes that are desperately needed, throughout the UK.
Here is a short summary of the key considerations people should think about when looking to get involved in P2P lending.
1) Is the company FCA regulated?
The platform itself should be regulated. Be wary of platforms that cite a third party’s regulated status.
The Financial Conduct Authority is the regulatory authority for 58,000 Financial Services firms and financial markets in the UK.
The FCA has a rigid compliance system which regularly monitors companies’ actions in order to provide checks and balances to ensure that customers are safeguarded from unscrupulous or negligent activity.
Third party regulated status does not mean the company is not reputable, but it does mean that it’s not subject to the same scrutiny as an organisation that is FCA regulated organisation in its own right.
2) Does the platform have a track record?
This might be deemed by some as a common-sense point, but it is pivotal to look into a lender’s history prior to committing capital.
Regulated platforms are obliged to publish statistics on the performance of their Loan Books, including defaults and adjusted real returns.
Shop around: Regulated platforms are obliged to publish statistics on the performance of their Loan Books, including defaults and adjusted real returns
If it’s a fledging lender, then it would be sensible to look at the management team behind the project.
Do they have a track record in property or finance or are they more tech savvy? You need to decide if you trust them with your funds.
3) Are the claims it is making for its rate of return evidence based?
Peer to Peer and other alternative lenders often publish headline interest rates. And although a published rate may apply to new loans, it may not reflect the historic average performance of a portfolio of loans.
If you’re lucky you might only invest in the good loans but that may not always be the case. It is prudent therefore to spread your risk across multiple loans and you are then more likely to achieve a better return that takes account of any defaults.
Of course with secured lending and conservative Loan to Value, the risk of loss of capital is much lower.
4) Does the management team have the expertise relevant to their sector, or are they relying on an algorithm untested in a downturn?
Algorithms are undoubtedly a valuable tool to use when testing the viability of a business or consumer borrower. However, in order to produce reliable data, it should be stress-tested in prosperous as well as challenging times.
The lender should also always have expertise in the sector they are lending in. It’s always a good sign when a P2P lender identifies its sweet spot and hones in on this experience.
Diversification can be a positive, but only if the management team really understands the sectors they are working in! It is important to ensure that the lender has a team that are experts in the sectors they work in and should also possess broader Financial Services experience so that only the safest propositions are offered to clients.
5) Are the loans secured on assets?
This is an area that is typically missed, but is possibly the most important factor to consider.
If loans are not secured on tangible assets that have been independently valued, there is little that the P2P lender can do to recover funds lent if the borrower defaults.
6) Are asset valuations and LTVs conservative?
Once you’ve ascertained that the lender has secured its loans on assets, it’s very important to ensure that the assets have been valued by reputable and trustworthy independent professionals. This will indicate how valuable the lenders security is, which will become very important should the loan run into difficulties.
Loan to Value is the loan amount expressed as a percentage of the value of the property asset provided as security.
Michael Lynn, pictured, is the chief executive of Relendex
The Loan-to-Value varies from loan to loan. New loans are capped at a maximum LTV of 70 per cent.
Loans with an LTV of 70 per cent or less provide the lender with some reassurance that their money is being invested appropriately.
The value of the asset security would have to fall by 30 or 35 per cent below its valuation before capital was at risk.
7) Does the platform offer an Innovative Finance ISA wrapper?
These wrappers offer protection from income tax on returns earned from a variety of financial products.
8) How easy is it to withdraw funds and what, if any, are the costs?
For many lenders, they will want to withdraw their funds at some point. They need to make sure that the platform they are investing through offers this service.
From the outset you should find out what fees there are so that you are not caught out by hidden charges. Ideally, it should be a quick and easy process that does not incur fees.