Lancashire council goes into the loans business

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Council buildingJohn Giles/PA Wire

It seems like an odd development for councils, given that so many are struggling to make ends meet at the moment, but Lancashire County Council has decided that the best way to kick-start local businesses is to lend them money. It has set up a partnership with a peer-to-peer lender, which it says will plough much-needed funds into local firms.

So how will it work? And will it take off elsewhere?


Peer-to-peer


The website will rate each funding opportunity with a level of risk, so investors know what they are getting into. And they can put as little as £20 into each loan, so their risk is spread.

The council will fund the first 20% for local businesses on the site. The rest of the loan will then go on the marketplace to attract other lenders. The idea is that your loan is auctioned out. Lenders bid for the chance to invest in you, and suggest the rate of interest they want in return. When the auction closes, you lend at the lowest rates that have been bid on your loan.

The council is putting £100,000 into the initiative - which it expects to blossom into a multi-million pound lending arrangement over time.

Why not?

This isn't the first social welfare initiative on the site. At the moment there is a school looking for £88,500 of working capital - which is going to cost it 10%.

There is clearly the cash out there. This site alone lends approximately £1 million to small businesses every week, and is running at a total of almost £58 million. And this is far from the only one of these sorts of services - the biggest player in the UK is Zopa, which has lent more than £200 million.

The average investor puts in £2,720, and makes 9.1%. It's a decent return for the council, its a source of funding for the businesses, and it's an interesting option for investors.

Maybe the question shouldn't be why a council is going into the loans business like this, but why the others aren't.

But what do you think? Let us know in the comments.

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