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Cut out the middleman with asset-backed lending
Asset-backed lending is a relatively new product in the peer-to-peer lending marketplace. Ben Judge explains how it works.
Peer-to-peer (P2P) lending is an attractive idea. By bypassing traditional banks and finance houses and lending direct to individuals or businesses, you can potentially earn a much higher return. One problem with it, however, is security. How can you be sure the people you lend it to will pay it back? What if they go out of business? The risk involved with P2P lending is far higher than in a savings account. There is no guarantee the borrower will repay you. If they don't, your investment isn't covered by the Financial Services Compensation Scheme (FSCS), unlike money in the bank.
A relatively new product in the P2P marketplace called asset-backed lending, or asset-based lending, aims to reduce at least some of the risk by securing your loan against the borrower's assets. In some cases, loans are secured on physical assets such as property, equipment or inventory.
In others, the assets used are intangible, such as invoices that the business has issued. Invoice financing includes both "factoring" which involves the borrower purchasing a business's unpaid invoices and collecting money directly from the customers and "invoice discounting", where the lender advances money against the invoices but leaves the borrower to collect the money from customers and repay the loan.
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Invoice financing accounts for 80% of asset-backed lending, according to the Asset-Based Financing Association (ABFA), an industry body that represents lenders in the UK and Ireland. Physical assets account for just 20%. Asset-based lending rose by 22% in the third quarter of 2016 to a record £4.3bn, says ABFA.
A typical user of asset-backed finance is a small-to-medium-sized company with a cash-flow problem that has had difficulty in securing lending from mainstream sources. The sector is expected to expand further, says the ABFA, since many businesses' cash-flow problems are set to increase in part because of uncertainty following the EU referendum, which has led to "longer payment delays and higher import costs".
The industry will also get more attention as a result of the government's bank referral scheme. Since 1 November 2016, the country's biggest commercial banks must refer UK small businesses who do not meet their criteria for a mainstream loan to alternative finance providers .
A great deal of asset-backed lending is carried out by big finance houses: ABFA's list of members includes Barclays, HSBC and RBS. But there are plenty of platforms available to individual investors, with a whole range of assets used to back loans. Those looking for some spice needn't restrict themselves to lending against invoices and sales ledgers. Several platforms will issue loans against property and it's even possible to dip into the aircraft leasing market, or lend against luxury yachts.
The more exotic end of the lending market
If the idea of securing your money on invoice financing or buy-to-let mortgages doesn't float your boat, then how about lending on a luxury yacht? At the more exotic end of the asset-backed lending market there are companies that take personal assets for security 21st century pawnbroking over the internet, effectively.
For example, online lender Collateral claims that you can get a return of up to 12% investing against "professionally valued property and other items of value". Examples include a £5 gold coin from 1839, offered as security for a loan of £80,000; a diamond and gold Rolex watch offered for a loan of £30,000; and "525 carats of loose emeralds" offered for a loan of £5,000.
Collateral says the value of the loan will not exceed 70% of the value of the asset. However, we'd point out that valuation of these assets can be a very inexact science. If the borrower defaults and the asset needs to be sold, what it fetches and how hard it is to sell might result in an unpleasant surprise.
Elsewhere, HNW Lending offers loans secured on assets, including classic cars and supercars, yachts and boats, antiques and objets d'art. Unlike many other platforms, this has a minimum investment of £10,000. It has been operating since April 2014 and boasts on its website of "no losses to date". That may be so, but this kind of lending still carries substantial risks. In particular, while HNW Lending allows lenders to use pension fund money to make loans, this is something we would very strongly advise against doing.
A range of different business models
There are many platforms that offer asset-backed financing for individual investors. Some of the best known are Wellesley and Assetz Capital, with Money & Co, headed up by City "superwoman" Nicola Horlick, a fairly high-profile recent addition. None of these platforms are covered by the FSCS. While some have their own provision funds to repay investors if borrowers default, you can't be sure that these will be well-funded enough to repay your investment if a number of loans go sour.
Wellesley tends to make loans to property investors and developers, which are secured against assets "primarily but not exclusively limited to residential property". Wellesley lends your money to "carefully chosen, creditworthy borrowers", but you only get 2.35% interest. With loans secured on residential property, you are at the mercy of the property market. Other property lenders include Landbay, which offers investments secured on buy-to-let mortgages and offers an expected return of "up to 3.75%"; and Proplend, which lends on commercial property and claims investors can earn between 5% and 12%.
Assetz Capital lends to small businesses, and offers a range of accounts. Its 30-day access option offers gross interest of 4.25%, while its "Great British Business" account allows you to spread your investment across a number of businesses, and promises a typical return of 7% gross. Money & Co lends to small firms, taking a charge against the company's assets.
It says it carries out an "extensive credit analysis" of potential borrowers, rating them from A+ to C+, with returns raging from 7% for an A+ rated business, to 11% if you choose C+. Loans range between £50,000 and £3m. Ablrate began by lending to aircraft-leasing firms, but has since branched out.It says lenders are "enjoying 10%+ returns".
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