The amount of money being lent to small and medium enterprises (SMEs) has been falling for years and continues today. By Bank of England estimates, lending from High Street banks to smaller businesses fell another £583 million in the second quarter of this year.
When they can find financing, it’s expensive and it’s tied directly to sales. It’s become common to tie loans to invoices. Meaning that payments are a percentage of sales instead of being amortized over time. The cost of these loans is prohibitive for struggling small and medium enterprises. For example, invoice financiers Platform Black and MarketInvoice are quoting returns to investors of 15 percent a year. A clear indication that interest rates they are charging SME borrowers are highly excessive.
Lenders are Creating Their Own Demise
Unreasonable interest rates don’t reflect the risk lenders face. Instead, these unreasonable interest rates create the risk that will lead to defaults on the loans. Since “invoice loans” are only secured by future revenues (and sometimes inventory), ultimately these lenders are likely to go under by their own making.
According to the Asset-Based Finance Association, these loans are up sixteen percent year on year. Recently, reaching a quarterly high of £62.5 billion. However, as the demand for these loans has grown, so have the complaints about the hidden fees these providers charge. In fact, many borrowers are being driven into involuntary insolvency. Fortunately, another alternative lending source is growing to replace these high interest and predatory loans.
Turning to Peer to Peer Loans
Where small and medium enterprises are finding some relief is through “peer to peer” loans (P2P). These are typically individuals making loans through Individual Savings Accounts (ISAs). Whilst not inexpensive, the interest rate charged is hovering around seven percent. Much more affordable than invoice loans.
The top three online sites helping arrange these peer to peer loans are:
• Zopa
• RateSetter
• Funding Circle
The Taxman Might Help
Currently, one issue limiting how available these loans are, is the tax complication they present to individuals. Taxes must be paid on the earnings from these loans. Unfortunately, losses from loans that are not repaid, are also not tax deductible.
However, peer to peer loans may become more popular because the government is beginning to encourage these loans and might take action to make them more tax friendly. P2P loans offer help to the weak economy both as an alternative to the lack of business loans from High Street Banks and as a way individuals can earn decent interest on their ISAs.
