Why I'm putting my money into British businesses
Lending my money through RateSetter has got me a better return than if I'd stuck with the banks. But it's time for a change, and that means putting some money into businesses.
Back in July I wrote an article about why I had started saving with RateSetter.
Fed up with the paltry rates of interest available on savings accounts from the mainstream banks and building societies, I decided to get my hands dirty by experimenting with peer-to-peer lending.
I decided to have a go with the monthly account, meaning my money was never too far out of touch. And to start with I got a rate of 3.6%, which at the time was far better than any bank would offer.
And then Funding for Lending happened. As we’ve written previously, this Government scheme has dramatically reduced the rates on offer from savings accounts, and clearly peer-to-peer lenders have not avoided its effects either.
Today the rate available on the monthly access account is just 2.3%. That’s a hell of a fall in six months, but it’s still incredibly competitive compared to the best easy access and notice savings accounts. The process was very easy too, so I’m more than happy to recommend giving RateSetter a try.
I’m moving my money
That said, I have decided to move my money elsewhere to test a different type of lender. This time I want to see what it’s like when my money goes towards helping a British business, rather than Joe Bloggs who needs a loan.
Obviously, this is a very different proposition – I won’t necessarily be able to get my hands on my money again within 30 days, as I could with the RateSetter account. But if you fancy putting some money away for a bit longer, and want a better return than from a bog-standard savings account, they are worth a look.
Three sites in particular have caught my eye.
First up is FundingCircle. Once you register with the site you can scan through the various businesses on the site that are looking for a loan.
There’s an incredible amount of information on each business. Each business is given a grade based on how risky they are as an investment, from A (low risk) to C (average risk). When you lend to a business, you make an offer of what rate of interest you want on your cash. So for example, on Business A’s page, you can see that it may have accepted a loan of £9,000 at 7.6% from one Funding Circle member, but turned down an offer of £15,000 at 8%.
There’s a business profile, which includes info on why the business wants the loan, its credit score (which is compared to the average scores of other businesses on FundingCircle in terms of industry, size and age), the financial summary of the company and even a Q&A section where investors can ask specific questions about the business and the loan.
What’s interesting to me is that most of these are established businesses that you are putting your money into – there’s the audio firm that was set up in 1988 that’s looking to relocate, the fine food importer that was incorporated in 1993, the manufacturer that has been going for over 50 years. There’s a solid history behind many of them to take into account.
If you do invest in a company and part way through the term of the loan you want to sell off part or all of that investment, you can do so through the auction functionality. However, you will have to offer a discount to do so. Currently the most popular discount looks to be around 2.6-2.7%.
Minimum investment: £20
What return will I get? FundingCircle claims that the average investor gross yield (before fees or any bad debts) is 8.9%.
Tax: Returns are paid before tax is deducted so you’ll have to declare your gains to HMRC in a self-assessment tax return. Unfortunately you cannot lend via a SIPP or ISA currently.
Seedrs is a slightly different proposition, focusing instead on startups. That means that your investments are much riskier, but also – to me anyway – more exciting.
Businesses on the site currently looking for funding include Make That Move, a dance video-sharing site available as an app, My Local Instructor, a search and comparison site for driving lessons and even Sponsor Me Student, which pairs students with sponsors who will help fund their education.
Each business provides information on their idea, how its marketplace looks, the team involved and of course what equity is being offered in exchange for the investment. So for example Sponsor Me Student is offering 5% equity in exchange for £25,000.
Again, there’s a Q&A feature if you want to get some more specific details, and a breakdown of who has invested (and how much they’ve invested) in the firm. It's all very Dragon's Den.
Minimum investment: £10
What return will I get? That all depends on whether the firm you invest in is successful. You are buying shares in the business, so if the business does well, the shares will end up worth more than you paid for them (in theory)
Tax: The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 and offers significant tax relief to investors who purchase new shares in very-early stage companies. Most of the businesses on Seedrs are SEIS-eligible. You can get full details in the SEIS section of the Seedrs website.
Finally, Abundance Generation. This time you’re not investing in a business as such, but rather a renewable energy project.
For example one project currently open for investment is from Padero Solar, which is planning to install solar panels on homes across the South Downs. What you are buying here is a debenture – essentially an IOU from the energy developer over a specific term. So all being well, you should get back your initial investment plus a regular income over that term.
With the Padero Solar project, the firm reckons that you’ll be enjoying a twice-yearly income, and an effective rate of return of 6-7.8% over 20 years (that’s after fees). There’s a handy returns calculator on the Abundance Generation site to help you work out what return you can expect from each investment. In this example, over 20 years my £50 would become £92.65.
You can also sell your debenture before the end of your term.
Minimum investment: £5
What return will I get? Abundance Generation says it aims to more than double your money, though your return will depend on the exact projects you invest in.
Tax: Your investment income (the money paid to you that isn’t the return of your original investment) is subject to Income Tax, in much the same way you pay tax on the dividend from a share. You may also have to pay Capital Gains Tax if you sell your debenture for more than you paid for it. While debentures cannot be held in an ISA, they are eligible to be held in a SIPP.
Where would you invest?
Personally, I’m far more intrigued by the idea of being a helping hand on day one for a business, so Seedrs appeals. But then I’ve always liked a flutter, and in reality that’s what it is – a gamble.
And as a shameless do-gooder, putting some money behind renewable energy projects is attractive too, particularly as I can stick it in my pension. What do you think? Where would you put your money? Let me know in the comment box below.