How fintech can beat the banks and offer you competitive savings rates
With interest rates at a record low, business owners – like all savers – are on the hunt for ways to make their money work harder. Here are six alternatives you might not have considered
With the savings rates offered by banks at an all-time low, business owners are on the lookout for alternative savings opportunities.
Rather than the modest 0.1% or 0.5% offered by most banks, the alternative saving and investment sectors have seen significant growth, offering rates of up to 15% per annum.
We look at the different alternative investment options available to you…
You can see a full summary comparison table of the different options at the bottom of the article.
This is currently one of the most popular ways to obtain a higher interest rate, with the peer-to-peer (P2P) lending industry estimated to reach £7bn in 2017.
The P2P model is based on investing your money with a lender like Zopa, Ratesetter and ThinCats and having this lent out to another borrower looking for a personal or business loan. How much you can earn as an investor is based on your risk appetite, with good credit customers offering a return of 3% and bad credit customers up to 9.9% for the increased risk.
The loans offered are typically unsecured, meaning there is no security other than the customer’s eligibility, based on their credit history, income and affordability. But there is always a risk of a defaulted loan and the initial investor losing out or not getting the exact rate that they were initially quoted – although lenders stress that this is rarely the case.
Although P2P lending is regulated by the Financial Conduct Authority, money invested is not covered by the Financial Services Compensation Scheme (FSCS).
The UK Government introduced the Innovative Finance ISA (IFISA) in April 2016 to some select P2P lenders in the UK and this provides a tax-fee ISA for the first time.
Other than being tax free, the benefit is that the potential savings are higher than P2P, at around 8%, regardless of credit history.
However, you may not always get the rate advertised because it is based on when the lender has deployed the funds; and if it takes six months to do this, you may only earn six months of the interest. You may require a five to seven-year period to earn the full rate advertised and you may have to sell it on if you want the return sooner.
Investors are able to put their money into property investments and receive returns of around 3.5% per annum.
In the case of Landbay, investors can offer as little as £100 and choose to invest in a project that is a buy-to-let mortgage, secured by way of first charge. The funds are lent out and the borrower repays each month, with the interest then passed on to the original investor.
Investors have the option to withdraw their money at the end of the loan term or reinvest it in another project. If the borrower defaults, there is a reserve fund which is made up of interest from various projects and this should be able to reimburse any losses incurred by the investor.
Those companies specializing in the P2P business loan sector will have a variety of small businesses available for funding. As an investor, you can choose which businesses you want to invest in, ranging from catering, retail, finance and more. You receive interest from the small business itself and can always sell on the loan to someone else to earn more.
Based on an example from Rebuilding Society, the interest rate varies based on the business opportunity but can typically be around 10% to 15%. You have easy access to your funds so you can withdraw them at any point, but this will affect the rate you receive (positively or negatively) as your investment then goes to the next highest bidder.
Investors are able to save against individuals who are taking out guarantor loans and receive returns of up to 10%. This type of finance is typically popular for those with bad credit who may have been turned down for other mainstream finance. The idea is to have an extra person with good credit to be their guarantor and co-sign their loan agreement – promising to repay the debt if the main borrower cannot.
This presents a good investment opportunity for individuals as the loans have a very low default rate of around 5%. Having the guarantor to back up the loan, especially if they have a strong credit rating, means that the risk is reduced significantly for the lenders and investors involved.
Currently leading this area is London-Based Guarantor My Loan, offering interest rates of up to 10% based on lending out £1,000 over three years.
This allows you to pitch to purchase a stake in a small business or start-up. Usually through a platform like Crowdcube, the business states how much of a stake they are willing to give up based on their valuation e.g. 7% or 15%.
This is a bit more fun than investing in business loans as you get to review each company’s business plan and follow their progress, rather than it being anonymous.
As an investor, you have the opportunity to make a huge return if the company achieves its goals and valuation. However, you have to consider the risks associated with start-ups and what happens if they fail. If the shares are disposed at a loss, there is the opportunity to claim income tax relief.
|Product||Savings Rate||Per £1,000 per annum||Source|
|Peer to peer loans||3.3% to 9.9%||£1,033||Zopa|
|Innovative Finance||8%||£1,080||Innovative Finance ISA|
|Business loans||10% to 15%||£1,150||Rebuilding Society|
|Guarantor loans||10%||£1,100||Guarantor My Loan|
|Equity Crowdfunding||1% to 20%||Depends||Crowdcube|