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P2P Lending

p2p-picYears ago, if you wanted to borrow money for your business there was only one place to go – the bank. Fortunately, things have changed. One of the new ways to invest and borrow money for your business is through Peer to Peer (P2P) lending.

What is P2P Lending?

P2P lending allows people with spare cash to lend to people or small businesses who want to borrow. It lets people lend to other people directly, cutting out the bank as middleman. The beauty of the idea is that both the lender and the recipient can benefit when compared to traditional ways of borrowing and lending.

P2P is an online phenomenon. There are now around 40 P2P lending platforms in the UK, the most well known of these are probably Zopa and Funding Circle. Zopa has loaned more than £688m since it was formed in 2005. You can lend as little at £10 for a period of 3 to 5 years and the money is then divided between different recipients (spreading your risk) The company is currently offering a 5% pa return after deducting a 1% fee. Funding Circle, set up in 2010, has lent more than £453m to over 5,000 different businesses. From the lenders perspective there is a minimum bid of £20 but the average investor lends approximately £6,000.

Lenders

So for example if you are a wealthy individual disappointed with the return you get on your cash from the bank you can deposit your money with a P2P platform who will lend the money on your behalf. Investors then receive monthly repayments of capital and interest. Unlike money deposited with banks you can see who your money is being lent too and set the interest rate you’re happy to earn (based on the risk factor of the recipient). Essentially it generates a greater return for the lender when compared to holding cash with the bank.

Borrowers

If your business is struggling to get finance from the bank then P2P lending presents a great opportunity. It saves costs for the borrower. The process is quicker with better interest rates, terms and fees (including in some cases no early repayment fees). In other words it saves you administrative costs and provides a more accessible source of finance.

Tax implications

Interest received from P2P lending is paid gross and is taxable so it must be declared on your end of year tax return. At the moment there is no tax relief for bad debts or fees however the Chancellor announced in his recent Autumn Statement that from April 2016 individuals lending through P2P platforms will be able to claim tax relief against P2P income for bad debts occurred from April 2015.

Stephen Hill Partnership are a firm of accountants based in Medway, Kent. Download our App for the latest tax news, handy calculators and more.

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