Alternative Investment  

Why crowdfunding may not be for everyone

This article is part of
Guide to crowdfunding and P2P lending

Why crowdfunding may not be for everyone

Ever since the financial crisis, savers have had to endure staggeringly low interest rates, with the Bank of England base rate barely hovering above zero, while borrowers have found it harder to raise loans.

Coinciding with the technological development of online platforms, and the increasing reliance on the internet for many more aspects of our daily lives, the peer-to-peer (P2P) finance and crowdfunding sector has exploded, offering a much more tempting place for one's money.

Many crowdfunding or P2P platforms offer returns of at least 4 per cent, sometimes going considerably higher - but investing via one of these platforms is not nearly as straightforward as putting one's money into a savings account, and they can come with considerable risks.

This guide attempts to explore how P2P finance works, some of the risks, and how to go about selecting the right platform.

The sector started in the UK with Zopa, when it launched its peer-to-peer lending platform in 2005, and is divided into two: peer-to-peer lending to small businesses and individuals, and crowdfunding investment through equity and debt.

The sector finally got the official seal of approval in 2014 when it became regulated and in 2015 it was announced that savers could access this form of financing through an Isa, the Innovative Finance Isa - the returns and interest one makes on peer-to-peer loans and crowdfunding debt could be tax free, with a maximum investment for this year of £20,000. 

Treading carefully

However, many in the financial adviser community are wary of suggesting people should invest via these platforms, especially the P2P platforms which receive much more capital, because the concept can seem like an alternative to cash savings, whereas in fact they are much more risky than a cash deposit.

Kay Ingram, director of public policy at LEBC, says: "One of my concerns in these adverts for these Innovative Finance Isas, are that the comparisons are often made with cash deposit rates but it's a totally unequivalent comparison. It doesn't take account of the fact that a P2P lending platform is much more risky than a cash deposit."

Returns on P2P platforms being promised range from about 3 per cent to 7 per cent, which is a clearly a lot more than a typical cash Isa of just above 1 per cent at the top of the 'best buy' tables.

Anna Bowes, director at SavingsChampion, says: "I wouldn't say that you shouldn't touch it. You just shouldn't be comparing apples with pears, and making them all apples.

"You get some providers making it clear that this is not a savings account. The difficulty is that the concept is the same - you put your money in and you lend it to somebody else, and you get an interest rate, but the mechanics of it are different and the risk profile is different.