The savers who fancy themselves as Dragons' Den judges: Investors stake £1.6bn a year as crowdfunding takes off

By EDMUND TIRBUTT, FINANCIAL MAIL ON SUNDAY

Updated:

Desperate savers hunting for better interest rates are expected to lend a staggering £1.6billion to firms and other people this year as the crowdfunding revolution takes off.

Crowdfunding, which includes ‘peer-to-peer’ lending, matches people who have money with businesses or households who want to borrow. Interest paid to lenders can be as high as seven per cent.

Last year nearly £1billion was invested this way, double the previous year’s figure, according to new data from charitable research organisation Nesta. It predicts an ‘alternative finance market’ worth a further £600million this year.

Tapping cash: Crowdfunding matches people who have money with businesses or households keen to borrow

Tapping cash: Crowdfunding matches people who have money with businesses or households keen to borrow

Poor savings rates, a drought of bank lending for companies and the possibilities provided by the internet have all helped crowdfunding to prosper.

This month the Treasury is expected to consult further with the industry about the potential for shielding peer-to-peer investments within tax-friendly Isa wrappers. The fact that investors can often participate with as little as £10 or £20 is another big attraction.  

 

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But the market’s growth has attracted the attention of regulator the Financial Conduct Authority.
In October it launched a consultation on how consumers should be protected when using loan-based crowdfunding platforms.

This is in the run-up to the watchdog taking over responsibility for consumer credit from the Office of Fair Trading in April.

Philippa Gee, boss of financial adviser Philippa Gee Wealth Management, in Church Stretton, Shropshire, says: ‘There’s nothing wrong with these investments, but the issue is how much you put in. If it’s more than 5 to 10 per cent of your portfolio, you need to question your reasoning.

‘Problems begin when people are led by their hearts rather than minds, as everyone seems to fancy themselves as being a Dragons’ Den judge.’

Crowdfunding can be divided into a number of areas, which are affected by regulation in different ways.    

- PEER-TO-PEER LENDING

This is a relatively low-risk option and will become regulated from April, ensuring customers are treated fairly and enabling them to pursue complaints free of charge via the impartial Financial Ombudsman Service.

Investors make loans to established firms and receive monthly payments. Funding Circle, the biggest operator, says its investors enjoy an average return of 5.8 per cent a year after all fees and bad debts.

Making hay: Sebastian Parsons, centre, with extended family at the farm

Making hay: Sebastian Parsons, centre, with extended family at the farm

Farm shares yield 5 per cent through its organic growth

Stockwood Community Benefit Society was launched last year by members of the local organic community, mobilised by entrepreneur Sebastian Parsons, 44.

The aim is to help secure the purchase of Rush Farm, near Redditch in Worcestershire, at the end of this year.

The organic farm is a wildlife haven and investors are being given the opportunity to buy shares for as little as £100. They will receive a 5 per cent yield, derived primarily from the farm’s business park.

Sebastian says: ‘The chances of the yield falling are negligible because the business park is almost always full. The financial return is every bit as enticing as the social and ethical angle.’

Customers can either lend to individual businesses or spread their money across a pool of companies.

David de Koning, spokesman for Funding Circle, says: ‘Some 1.6 per cent of our book has been unable to fully repay its loans, but our research shows that everyone who has lent to at least 100 businesses equally has earned a positive return.

‘It is not a savings product but a low-risk investment product.’

- SOCIAL INVESTMENTS

These offer a chance to invest in local causes such as renewable energy, farms, pubs and village shops. Some offer no prospect of capital growth but income of 3 to 6 per cent a year.

One is Abundance Generation’s Nottingham SunShare, a solar panel installation paying 6.5 per cent, half yearly, to investors over 19 years.

Many social schemes are exempt from regulation by virtue of their small size and community focus.

- EQUITY INVESTMENTS 

Those ready to take more risk can buy small tax-friendly stakes in start-up and early stage firms via equity-based crowdfunding platforms, such as Seedrs and Crowdcube.

An investor in Seed Enterprise Investment Schemes, for example, can receive initial income tax relief of 50 per cent on the sum invested and exemption from Capital Gains Tax.

Alysia Wanczyk, marketing director at Seedrs, says: ‘None of the 38 firms we have funded since our launch has failed but we make clear it’s high risk because most start-ups do fail and we encourage having a highly diversified portfolio. Some investments are worth a hundred times their original value, so you only need to get one real winner to be sure of a positive return.’

Equity investments are already regulated, but the regulator is proposing strict marketing rules so customers understand the risks.

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