Conflicting Information

Author

Date

24th January 2017

It is sometimes difficult to know who to believe when there is conflicting information emanating from two supposedly reputable sources – the pre-Brexit propaganda war immediately springs to mind. In this case, we have the NACFB proclaiming that there is a ‘plethora of lenders’ in the market, while Small Business recently reported that 1,093 small companies are expected to cease trading in January through lack of finance. This sits alongside other, equally alarming statistics such as the fact that 3,633 business failed in Q3 of 2016 and that only 41.4% of UK businesses started in 2010 survived to their fifth birthday.

Of course, some of the companies heading for the drop will not have been up to standard in the first place, but it beggars belief that they should all be in this category. Is it that the owners of these businesses simply don’t know what sources of finance are available and don’t know where to turn? Or is the NACFB mistaken? Either way, there is clearly some kind of information gap.

We know from other sources that, partly due to the uncertainty surrounding Brexit, SMEs are currently of a mind to borrow less and to hold on to more of their cash; according to the British Bankers Association (BBA), SME lending in Q3 2016 dropped 13% against the same period in 2015. The BBA also revealed that SME deposits have risen by 5% to over £170bn.

The trends suggest fear of what the future may hold. Many SMEs are trapped in a cash flow squeeze brought about by staff who expect to be paid monthly and suppliers who routinely pay on 60 or even 90 day terms. What do you do – turn away business that might give you a 30% profit margin or borrow the working capital which may cost the equivalent of 10%? The logical answer may not be immediately apparent to everyone.

Invoice finance undoubtedly has its place in the market, but it is no panacea. Because of the high costs involved in terms of fees and maintenance, at worst it can be an expensive fix that suits the provider far more than it suits the SME.

Subject to appropriate due diligence processes and appropriate security, P2P loans are available to help with a wide variety of problems, including short term cash flow. They are also available to companies that want to borrow to invest and grow. There is no stigma attached to borrowing money for the right reason and at the right price. There has never been a better time.

France

Author

Angus Dent

Date

13th January 2017

There was a time, not so long ago, when having some cash in the bank earning a reasonable level of interest was considered quite a smart thing to be doing, particularly since you could be pretty certain that your capital was safe. But that was before the 2008 financial crisis and interest rates fell through the floor – not just in the UK, but globally. Your money remains in a secure place, but you are likely to be earning next to nothing in real terms.

The problem is so severe in some parts of the world – Japan, for example – that you have to pay a bank to look after your cash because interest rates are negative. Closer to home, in France, where the equivalent to what we call Base Rate is 0%, the very best rate of interest you can hope to receive on your savings is 1.75%; or 0.75% if you want to retain reasonable access to your money.

If you take into account the fact that inflation in France is running at around 0.6% – not too bad, in European terms – it means that de facto savers are earning zilch. And if you factor in that their powerful neighbours, Germany, on which France depends for so much of its trade exports, have inflation running at 1.7%, it is inevitable that some of that inflation will be imported, reducing the actual return to less than zilch.

It would not take a massive leap of imagination to see that inflationary pressures are likely to increase, particularly if members of OPEC decide to restrict oil production and the global price goes through the roof as a result. To add to the gloomy outlook you have Marine Le Pen threatening to destabilise the whole political scene in France, with some commentators already speculating about the possibility of ‘FREXIT’.

All in all, it is probably not a great time to be sitting on a pile of cash in France, particularly if you rely on the interest generated to supplement your income. But if, as a French citizen, you cast your eyes across the English Channel you will see straight away that, because of the fall in the value of sterling since Brexit, investments in the UK are c12% cheaper than they were, say, six months ago. You will also see that returns of 6% or more, combined with reasonable security, are freely available through P2P loans. And if you look at ArchOver’s ‘Secured and Insured’ proposition – made possible with the help of Coface, an established French institution – you might just see the answer to your prayers. Let us hope so.

Switzerland

Author

Angus Dent

Date

10th January 2017

Switzerland is widely recognised as having one of the most independent, prosperous and stable economies in the world, which is why for decades nervous investors have regarded the country as a safe haven for their money in times of global turbulence.

In 2014, when Russia was facing huge problems and money was pouring into Switzerland chasing up the local currency, the Swiss National Bank surprised the world by dropping the domestic Base Rate to minus 0.25% in a determined effort to weaken the value of the Swiss Franc because it was damaging the country’s export effort. Today, and for the same reason, Switzerland’s Base Rate stands at minus 0.75%.

Although the Swiss economy has had two relatively sluggish years in 2015-16, it is expected to grow by around 1.5% in 2017. Yet Bond yields remain at minus 0.19%, which hardly provides rich pickings for local yield-hungry investors who, per capita, are reckoned to be the world’s wealthiest.

Back in the UK, we have a parallel situation regarding low fixed interest returns and following our decision to leave the EU – an organisation with which, of course, Switzerland has never been integrated – we are moving to a position where we will have even more in common.

The one crucial difference from an investor’s point of view is that the UK has developed some attractive alternative asset forms, such as P2P loans the demand for which is booming. Yields of 6% and more are commonplace which, bearing in mind the relative security provided by the larger platforms through provision funds or, in ArchOver’s case, credit insurance, represents something approaching a decent return.

No one is pretending that P2P loans are risk free – of course capital can be at risk – but many individuals and institutions have decided that, given all the information available, the transparency and free entry for investors to participate, the overall odds are worth accepting.

As ever, investment timing is vitally important. Sterling, which took such a battering following the Brexit vote, is slowly recovering and is expected to rise in value against currencies like the Swiss Franc. In the meantime, the lower value of our currency is doing wonders for our exporters and the UK economy is now expected to grow. All things considered, and bearing in mind that low interest rates look like being part of the financial landscape for the foreseeable future, now would seem to be a very good time to invest in UK PLC – leave it too late and you could ‘miss the bus’.

‘Bricks and Mortar’ Security

Author

Angus Dent

Date

5th January 2017

The Great British love affair with property and the unwavering belief that, whatever else happens in the world, good old ‘bricks and mortar’ will always be there to save the day, evidently remains undiminished. The major banks have based a huge part of their entire existence on using real estate assets as security and judging by the recent crop of pre-Christmas authorisations granted to some P2P platforms– LandBay, Landlord Invest, Folk2Folk to name just three examples – that same underlying faith would seem to extend to the FCA.

As one of the many established platforms still waiting in the queue for the ‘green light’ from the FCA, it is galling to be watching from the sidelines. Sour grapes, possibly. But it does raise the legitimate argument about what should represent acceptable security for P2P loans – something that we know has been taxing the mind of the regulator.

My motive in raising the subject is not to ‘rubbish’ the intrinsic value of UK property as an asset, but rather to question its suitability for the task in every situation. Security is based on two fundamentals: you need an asset against which you can formally register an interest; and you need an asset that can readily be converted into cash at or close to valuation should the need arise.

A property – be it a house, a flat, office building or hotel – undoubtedly retains a value and ownership can indeed be registered. But the accuracy of the valuation is not so certain, especially in a forced sale situation or where development forms a significant part of the proposition. At the end of the day, a property is worth what someone else is prepared to pay for it. In house ownership, for example, I suspect we are all guilty of expecting to sell our own property at the top, but to buy someone else’s place at rock bottom. We are often wrong on both counts. And the longer a property takes to sell, the more detrimental it is likely to be to the valuation.

Many ordinary people know what it feels like to be trapped in negative equity, especially if they are not party to the lucrative property game that operates in London or one of the other UK ‘sweet spots’. Reality is often far removed from mega deals that make the headlines and which are usually accessible to only a privileged few. Property assets with this potential are most unlikely to form part of the security used to back P2P loans.

It is a fallacy that all property lending is secure and suitable for retail.

On the other hand, assets such as sales invoices are designed to convert readily into cash; it is their sole purpose. You can’t live in them or run your business from them, but they can be registered at Companies House, they do have a face value and that value can be underpinned by credit insurance. Hopefully, one day this will be recognised by the regulator.