A Dummy's Guide To P2P Crowdfunding And The IFISA
7th October 2016
The peer-to-peer (P2P) industry, which first gained niche prominence shortly after the financial crisis, is fast becoming part of the mainstream, with savers attracted to the opportunity to access higher returns of up 8.7%.
Data from Nesta shows in 2015 £1,490 million was loaned through P2P lending platforms. This is an increase of a 99% year-on-year growth rate, and 194% average growth rate between 2013-2015.
It is not hard to see the reasons for P2P’s increasing popularity. Lending funds through P2P platforms, such as Crowd2Fund, can allow you to generate substantially higher returns than by keeping funds sitting idle in a savings account or cash ISA. Higher rates are achievable as investors are able to take some calculated risk and there is no middle man, making P2P a highly efficient form of investing.
Additionally, the recent introduction of the Innovative Finance ISA (IFISA), which allows P2P funds to be held in a tax free wrapper, is likely to result in even higher volumes transacted. The reason for this is that P2P lending through an IFISA, allows investors to benefit from tax free returns which gain further from compounding interest growth over time. Investors can invest up to £15,240 per year and transfer their old ISA funds to a Crowd2Fund IFISA account.
The recent drop in interest rates to 0.25% has prompted savers – and the personal finance press – to seek for alternative routes to maximise savings, and how best to keep them in line with inflation. As the debate continues, P2P crowdfunding and the IFISA are occupying more column inches than ever before.
In this post we address a number of commonly asked questions, in order to make investors aware of the risks and rewards of opening an IFISA.
What is peer-to-peer (P2P) lending?
P2P crowdfunding, which is a new type of lending facility, allows investors to enjoy substantially higher returns than they would see when keeping their money in traditional savings and current bank accounts. P2P tends to generate more generous returns than traditional financial institutions as it allows investors themselves to choose the companies they directly lend to, offering greater autonomy and control in the investment process. There are no middle men, which means no hidden fees cutting the level of interest returned – these higher returns are passed directly back to you, the investor, putting more money back into your pocket.
On P2P platforms investors tend to lend to a number of different businesses, rather than loaning funds to just one company. It is important that lenders lend to multiple businesses in order to better manage risk. This is so that, in the unlikely event a loan is not recovered, the loss is spread across an investor’s portfolio of loans. Diversification is key in better managing your risk, and P2P has this capability built in, thereby better protecting the investor.
P2P lending is also popular with growing, cash hungry businesses. As the banks continue to tighten their lending criteria, it has become increasingly difficult to borrow money from traditional routes. As such, P2P offers an attractive alternative to businesses seeking financing, and access to a greater pool of available capital. There are also the additional benefits of raising a loan from the public – doing so enables businesses to building their very own network of private investors, all with a vested interest in growth of the company.
What is the IFISA?
The IFISA is a new ISA product, introduced by the Government in April 2016.
Crowd2Fund is one of a handful of platforms to have received full regulatory approval for its rollout.
The IFISA differs from more traditional ISAs in that it allows investors to access higher rates than ISA accounts, whilst also being less predictable than stocks and shares ISAs. IFISAs allow investors to lend their money directly to businesses seeking P2P loans. It suits the needs of mainstream investors who want to save and invest for their future, making their money do more for them for the long-term. The main benefit of investing in P2P through the IFISA, is for the allowance of your funds to grow, and earnings are tax free from £15,240 invested per year.
What Sort Of Returns Can I Expect To Generate?
Each business listed on Crow2Fund, and included within our IFISA, are assigned a unique interest rate, relevant to their creditworthiness.
Crowd2Fund aim to offer investors an estimated APR of 8.7%. The actual return may very depending on any potential losses and also the businesses that are selected by the investors.
To date, in two years of trading, no businesses on the platform have defaulted against their debt payments. We believe this isdue to the careful due diligence that Crowd2Fund perform on all applicants, ensuring all maintain the requisite levels of compliance and transparency in the information disclosed.
How Safe Are My Funds?
Crow2Fund is one of just a few P2P platforms to be fully regulated by the FCA, and this is one the reasons our IFISA has been fully approved.
Being FCA regulated means that Crowd2Fund offers a best in class service, as well as giving investors the assurance that any risks are made clear to investors and that investor funds are ring fenced and held separately.
How Can I Mitigate Risks?
Whilst your capital is at risk, the best way to mitigate against risks of businesses defaulting on P2P platforms, is to diversity your portfolio by investing in a range of different businesses. Again, P2P lending makes it even easier for investors to diversify their portfolio of investments, offering a marketplace of different businesses – across size, scale and sector – where investors can invest in several via one single platform. This should be inclusive of different sectors and different risk categories. Therefore, whilst there still remains some risk of default, investors should still enjoy large net returns. Additionally, as of April 2016 the Government allowed for bad debt on P2P platforms to be netted off against returns, so that savers can benefit from the tax relief on this.
How Much Can I Invest In The IFISA?
In the 2015/16 tax year individuals can invest up to £15,240. It is expected that this will increase next year.
Can I Transfer Historic ISAs To The IFISA?
It is possible to transfer historic cash and share ISAs to the IFISA by filling out a simple form which will allow your funds to be transferred and stay within their tax wrapper. There is no limit to the amount of historic ISAs you are allowed to transfer to the IFISA.
How Can I Open Up An IFISA Account?
The process for doing this is quick and easy. Just click on the following link and spend five minutes filling out our online form.
Where Can I Find Out More Information On The IFISA?
The following page has more detailed FAQs on our IFISA. More information is available from the government here.
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