More positive news in peer-to-peer lending
Lancashire County Council (LCC) have become the first local authority in the country today to work with the new breed of “peer-to-peer” (p2p) lenders as a way of boosting local businesses. This is a superb example of collaboration between the public and private sector. I really hope that it succeeds.
LCC and Funding Circle are creating what the pair has called a “Local Business Lending Partnership” aimed at improving access to finance for small and medium-sized enterprises in Lancashire and, in the process, stimulating economic growth. I expect to see further similar schemes being announced over the coming weeks.
To kick things off LCC have invested £100,000 in Funding Circle. The decision by LCC seems to be designed to ensure that they rely on Funding Circles’ credit analysis, rather than using more direct and traditional routes. Investors, and in this case LCC, remain directly responsible for their investment in the event of the failure of any businesses in which they invest.
Lending Circle is the largest and best-known p2p lenders. It has a well-developed credit assessment system and its processes appear to be fit-for-purpose. However, the same cannot be said of all p2p lenders, some of whom operate on the fringes of the industry and who, in my view, represent too high a risk for both investors and borrowers.
This area of lending remains unregulated and as such anyone thinking about becoming involved either as an investor, or as a borrower, should only do so after having sought advice as the potential downsides are huge from total loss for the investor, to all sorts of issues from debt default to insolvency for the borrower. There is currently no specific ombudsman or regulatory body to whom you can turn with problems. Your only redress would potentially be through the courts, which could be costly.
My specific advice to clients seeking funding is to obtain professional support from someone who can do some Due Diligence on the lender and their terms & conditions. I know it is a cliché but the devil really will be lurking in the detail. This person would ideally ensure that you have the best available deal, not just in terms of cost, but also structure and conditions too.
Whilst writing, it is also worth stressing that aside from formal p2p lending, there are also networks of investors, business angels, and niche lenders. These entities normally operate through their intermediary networks and rely on these contacts to generate business on their behalf.
So before you decide to borrow money, the message is make sure that you have explored all possible avenues and that you have had the right advice and guidance for your particular circumstances.
Hawkmoor Associates Limited