With banks still reluctant to lend to businesses, peer-to-peer and crowdfunding websites have become lifelines for firms in need of capital.
These websites operate as online marketplaces where ordinary people can invest directly in companies which need to borrow money, the trade-off often being a better return on their savings.
The Government has recognised the impact of these social lending platforms and in its Business Finance Partnership scheme set aside £55 million for alternative lenders to distribute to businesses in need.
Funding Circlewas one of the companies to get a share of the pot, amounting to £20 million in March earlier this year.
Nine months on and it has nearly lent out the whole lot. £15.3 million has been distributed to 1,438 businesses on the government's behalf and Funding Circle has re-lent £2.3 million of repayments.
With Funding Circle ordinary people can lend to credit worthy SMEs that need a loan. Investors get an average of 5.7% after fees and bad debt (average 1%) – which is much better than any savings account around right now. The minimum amount you can invest is £20 and you can withdraw your money at any time by selling your loan parts on to other investors, which only usually takes 24 hours.
ThinCats is an online marketplace for secured business loans.
The website links experienced investors with established credit worthy businesses that need to borrow anything between £50,000 and £3million.
Using a network of sponsors it gets high quality, low risk deals for its investors.
Sponsors are financial services professionals who vet the applications for loans from businesses.
Potential borrowers are not allowed onto the ThinCats loan network unless they have the support of a sponsor willing to put their reputation on the line.
The average return for an investor lending with ThinCats is 10.42%. There are no fees for investing and the default rate is fairly low at 0.75%. ThinCats is slightly less risky than other peer-to-peer platforms like Zopa and Funding Circle as it requires borrowers to offer security for every loan so in theory it can be called in if a business defaults.
The minimum required to invest is £1,000. Lenders can bid using a reverse auction where the lowest average bids win or buy existing loans to start earning interest quicker.
You can also use the secondary market to sell loans to get access to invested funds but this attracts a fee of £25 or 1% of the outstanding loan (whichever is higher), capped at £75.
Funding Knight is a new platform which lends money to small, UK –based businesses with at least two years of company accounts on public record.
You can invest from £25 and Funding Knight claims it can get investors returns of more than 11%.
It works in a similar way to Funding Circle and ThinCats as you can bid for loan parts in a reverse style auction or buy existing loans from other investors to start earning interest straight away.
You can manage your investments manually and choose exactly which businesses you lend to or use the Autobid function to do the hard work which lets you set the level of risk you are willing to take and the amount invested in each new loan auction.
Each business will get a Shield Rating to indicate the risk attached to its profile. Five shields represents a low risk which is predicted to have an average annual failure rate of 0.4%. Four shields represents a medium risk and is estimated to have an average failure rate of 1% while the riskiest businesses get a three-shield rating which is expecpected to attract an average failure rate of 1.6%.
Investors don't have to pay a fee unless they sell a loan on where there is a 1% charge.
Funding Empire is a bit different from the likes of Funding Circle, ThinCats and Funding Knight as it allows you to invest in riskier businesses like start-ups and sole traders as well as more established companies.
Businesses with less than two years of trading are given a rating of N and lenders are encouraged to look at the business on merit to decide whether to lend as there is little historical information to go on. Businesses that have been trading for two years or more get a rating of A+,A,B or C with A+ being the lowest risk.
You can start lending from as little as £20 and choose to lend at a rate of between 4% and 15% but as is the norm with peer-to-peer sites you will be competing with other lenders in a reverse auction.
Currently the gross yield is around 7 to 10% for existing established businesses.
As it's a new platform launched just this year there isn't much information around bad debt to go on.
But Funding Empire provides free mentoring and support to start-ups to get them ready to apply for funding and to avoid the pitfalls of being a new business.
If you want to sell your loan to another investor in order to get out early, it is free to do so until January 2014. Thereafter you have to pay 0.25% of the outstanding loan to Funding Empire when you sell.
AutoBid and AutoSell functions will be coming in the first quarter of 2014 which will bring the service in-line with other more established platforms.
Seedrs is a platform that supports equity crowdfunding which allows ordinary folk to buy shares in small businesses that are normally start-ups.
The website lists campaigns from entrepreneurs with ideas they need help getting off the ground and you can invest from £10.
If the campaign receives all of the money it was looking for, you'll get shares in the business. If it doesn't you'll get back the full amount of what you pledged.
Seedrs manages the shares you have on your behalf and whenever it receives money from the shares either as a dividend or through a sale it gets passed onto you after a 7.5% fee.
As well as the opportunity to help fledgling businesses you might also qualify for tax relief on your investments.
With the Seed Enterprise Investment Scheme (SEIS) individual investors who purchase new shares in very early stage of start-ups can get Income Tax relief at 50% of the cost of the shares up to £100,000. You might also be able to get Capital Gains Tax relief if you reinvest in shares.
Ventures currently seeking investment on Seedrs include a Happy Days musical, an online marketplace for small craft alcohol producers called EeBria as well as a virtual training and local community for mums called Ready Steady Mums.
However, investing in start-ups is a risky venture and you could lose all of your capital or just not get much back.
Before there was Seedrs there was CrowdCube.
It was perhaps the first equity crowdfunding website in the UK which allows you to invest in small start-ups and become an 'armchair Dragon'.
You can invest from as little as £10 but you are required to build a portfolio of investments worth £1,000 over 12 months.
Pitches are listed on the website with a target investment. If the target is reached those that have pledged money become shareholds and in some cases will get voting rights in a company. If a target isn't reached the money pledged is returned.
In some cases pitches will also include rewards like being sent the product to incentivise people into investing.
Investing in businesses on this website also makes you eligible for SEIS so you could get tax relief on the returns you make.You might also be able to get Capital Gains Tax relief if you reinvest via the shares in the company as well.
Right now a social network for people that love games called gamesGRABR and a business called Solarmass which is producing better looking solar panels is doing well.
But again start-ups is a seriously risky business and you might lose some or all your investment.
Understanding the risks
Investing your money via peer-to-peer or crowdfunding platforms can be risky as you could lose all or some of your capital if businesses fail.
These website aren't covered by the Financial Services Compensation Scheme and there are currently no plans for that to happen.
The websites which are offering investors a return always recommend you diversify your portfolio to minimise risk. That involves investing small amounts in lots of different businesses to ensure if a business does default the impact is minimal.
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