Tag: smes

The Significance of the New “Innovative Finance ISA” for Investors

Author
Angus Dent
Date

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Amongst the clamour of the backlashers responding to George Osborne’s latest attempt to reduce the UK’s budget deficit, there was some welcome news for those investing in P2P Lending and for the P2P industry. The new Innovative Finance ISA will allow current and future investors to earn interest from P2P loans free of tax from April 2016.

Many see this as the government effectively rubber-stamping the legitimacy of the industry by offering conventional investors another reputable channel they can invest through. This will incentivise investors who may be put off by the risk involved in a Stocks and Shares ISA, but aim to earn more interest than they would receive from a cash ISA. Osborne hopes that thousands of new jobs will be created by helping SMEs to grow, which will subsequently help to haul down a budget deficit that he has already reduced from 10.2% of GDP to 5%.

Osborne ISA

Around 20 million adults in the UK have an ISA; if a fraction of those investors chose to invest their money in an Innovative Finance ISA it would create a huge supply of new lenders available to SMEs. However, the new law will be introduced after the start of the next tax year; it may take until 2017 for alternative finance platforms to on board the wave of new investors encouraged by the Innovative Finance ISA. Moreover, investors will need to be aware that they need to be proactive with their money. Alternative finance companies are unlikely to be able to pay interest on a lump sum as is done by banks handling a cash ISA. Instead, investors will need to gradually lend to a range of companies throughout the lifespan of the ISA. If not, the alternative finance industry will struggle to fund large one off interest payments when demand for borrowing is spread out over the entire year.

The complex nomenclature that differentiates debt and equity lending has been taken into account with the “Innovative Finance” umbrella term; it successfully covers the various alternative finance spheres as well as allowing any investors in future niche P2P lending spin-offs to reap the benefits of a tax free ISA. We will endeavour to decode some more of the complex terminology used in the world of alternative finance in another blog.

The Tyranny of Personal Guarantees

Author
Angus Dent
Date

The perils of signing a legal guarantee have long been conveyed by an old aphorism, which warns that ‘a guarantor is just a fool with a pen.’ But what was once received wisdom seems to be fading, as one particular brand of guarantor is now growing in number – those who sign up to the pernicious ‘personal guarantee.’

A poll of 500 small businesses by the Investment Management firm Legal & General found that of those with corporate debt, over 35% had directors who had signed personal guarantees. And it seems that lenders seeking this kind of security from directors is becoming increasingly common amongst smaller firms in particular.

So what does a personal guarantee entail and why are they becoming more pervasive? 

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Well, a personal guarantee is effectively a promise by a business’ director to make him or herself liable to repay corporate debt in the event of their business defaulting, meaning that they are putting their own assets on the line as collateral for a lender. A personal guarantee is not the only type of security taken against a loan, but can be pursued if the primary security does not cover the amount owed.

The guarantee does not necessarily attach to a director’s home but to their assets more generally. However, as the majority of people’s highest value asset is their house, lenders can act to repossess a guarantor’s property in some circumstances. Such an arrangement is understandably favoured by many traditional lenders who argue that it is the best way of aligning a director’s interests with their own – not to mention a means of further mitigating their risk. In fact many will now not lend to small businesses without personal guarantees being put in place.

But the question of whether it is good business practice for a lender to ‘pierce the corporate veil’ and take security on an individual’s personal assets remains.

I would argue that a company is either robust enough to take on debt or it isn’t, and that using personal guarantees to increase security in fringe cases will never be the answer for lenders.

It goes without saying that they are hated by those who must sign them too, and the reason for this is simple: an individual should not be expected to gamble their home to support their business activities.