9th July 2024
As the tax year approaches its end, many individuals are exploring options to maximise their ISA allowances. An Innovative Finance ISA (IFISA) provides a way to earn tax-free returns while supporting UK businesses. However, like any investment, IFISAs come with risks. Awareness of these risks is important when evaluating investment opportunities.
- Risk of Borrower Default
A key risk with IFISAs is that businesses receiving loans may not repay them. Unlike a Cash ISA, where savings are protected, IFISAs involve lending directly to small and medium-sized businesses (SMEs).
While many businesses successfully repay their loans, some may default. Diversifying across multiple businesses and sectors can reduce reliance on any single borrower. Platforms like Crowd2Fund offer tools to help build portfolios with varied investments, which can reduce exposure to individual defaults.
- Returns Are Not Guaranteed
IFISAs can deliver returns that vary significantly, often dependent on the performance of the businesses involved. Rates of return may be higher than those associated with traditional savings products, but they are not guaranteed and carry an associated level of risk.
Platforms like Crowd2Fund provide information about credit grades, repayment terms, and business profiles to help individuals assess the opportunities presented.
- Illiquidity
Funds in an IFISA are typically committed for the duration of a loan term, making them less liquid than other types of investments. Early access to funds may be possible if loans can be sold to another investor, though this is not guaranteed.
Crowd2Fund’s Exchange provides a mechanism for buying and selling loans, enabling investors to access funds under certain conditions. However, liquidity may vary based on demand for loans.
- Platform Risks
The stability and performance of the investment platform are important considerations. In the unlikely event of platform failure, loans would still exist, but accessing funds could be delayed or more complex.
Crowd2Fund operates as an FCA-regulated platform with contingency measures in place, including a wind-down arrangement. These measures aim to ensure loans remain ISA-eligible and repayments continue through third-party management.
- Lack of FSCS Protection
Unlike Cash ISAs, IFISAs are not covered by the Financial Services Compensation Scheme (FSCS). This means there is no compensation available in the event of a business or platform failure.
Crowd2Fund undertakes due diligence to assess the creditworthiness of businesses and provides detailed campaign information. This includes opportunities for investors to engage directly with entrepreneurs to better understand their business plans.
General Considerations
- Diversification: Spreading investments across multiple opportunities can help reduce the potential impact of any single default.
- Portfolio Management: Reviewing and adjusting portfolios regularly can ensure alignment with individual goals and risk preferences.
- Research: Accessing detailed business information and asking questions about investment opportunities can provide clarity before making decisions.
Important Information
The tax year deadline of 5th April is approaching, and many are considering their options for utilising ISA allowances. IFISAs are one option available, offering potential tax-free returns and a connection to UK businesses.
Crowd2Fund is an FCA-regulated platform offering IFISAs that connect investors with innovative businesses. Visit our platform to learn more about how IFISAs work and explore available opportunities.
