Many income-hungry investors are turning to peer-to-peer (P2P) lending. Cash deposits currently pay, according to independent comparison site, Moneyfacts, two per cent at best.
We run a guest article with the kind permission of Money&Co. It examines mainstream risk analysis - and the take on what might happen next in the White House is truly outrageous!
Money&Co. lenders have achieved an average of 8.6 per cent in the three and half years of facilitation and nearly £10 million of loans made by our registered users. We bring individuals looking for good returns together with carefully vetted small companies seeking funds to grow.
So what can go wrong?
If something sounds too good to be true, it usually is. Our belief is that, with no bad debts, and a very low default rate in our loan book, what we offer is very good – but definitely not too good to be true.
The prime reason for that is risk appraisal. There is no profit without risk, so it behoves us to take a long, hard look at those risks. Security for the Money&Co. loans is effected by taking a legal charge on the assets of the borrowing company. If the borrower defaults, we have the ultimate right to go in and take control of the assets, sell them and reimburse Money&Co. lenders. We have our own, rigorous credit-analysis process. Money&Co. does not rely exclusively on external credit-rating agencies, and examines each borrower application very carefully.
Here's an extract from an earlier News item on this topic: "Credit analysis can vary widely, as study by accountancy firm Shelley Stock Hutter (SHS) demonstrates. The media site smallbusiness.co.uk reports that SHS carried out an analysis of 100 private companies' credit reports, "and found Dun & Bradstreet, Experian and Creditsafe recommend vastly different credit limits for the same companies." So what characterises our approach to risk analysis when appraising a prospective borrower company comes along?
According to our credit-analysis team, we:
- Are open to lending to most industries, treating each business as a bespoke enterprise.
- Use a judgemental (human) decision-making process, rather than relying exclusively an algorithm-based calculations
- Take a flexible approach. We're open to working outside normal lending criteria where risks are low, or can be mitigated
- Keep it simple. We only require necessary covenants and guarantees. No 'nice to have' covenants.
Decisions to lend are based on:
- The person/people behind the business. (i.e. What is their track record with other businesses? What expertise do they have?)
- The amount and purpose of the request (I.e. Does it make sense? Does the borrower have 'skin in the game? Does it meet our credit framework guidelines?)
- Affordability. This is evaluated via: a) Review of historic financials, any up to date management information and b) Review of the business plan (including forecasts). Overall, we say 'Cash is King'. Many profitable companies may not actually generate cash because of CAPEX commitments, dividend policy, working capital requirements. We ensure that not only is the business profitable but also highly cash generative such that even where a significant downturn occurs the business will generate sufficient cash to meet loan payments.
- Security available - Debenture as minimum. PG is not a prerequisite and requirement is based on the perceived strength of the overall proposition.
So much for the mainstream stuff. As our CEO, Nicola Horlick points out there may be "freak events that threaten the whole system, but they wouldn't affect our average borrower. The main risk is that there is a deep, prolonged recession in the UK, accompanied by a sharp fall in property values."
And then, there's the not so serious stuff...
We asked bookmakers, Ladbrokes, to give us odds on some more unusual potential happenings.
The most mundane – the odds on a 1987-style storm, one that produces a market crash, turned out to be the most difficult to quantify. The odds on one of Boris Johnson's progeny becoming Foreign Secretary like the old man are just 500/1. This, despite the fact that Jonson is in his early 50s – and may have more children...
We were pleased and surprised that our favourite scenario was priced at all. After the rantings and ravings emanating from the White House, and the succession of successively bad-tempered and foul-mouthed press secretaries of seemingly ever-shorter tenure, we asked what the odds would be on President Donald Trump's appointing a horse as press secretary.
The last person to appoint a horse to high office was – according to popular belief – the Roman emperor, Caligula. Caligula was depicted by Suetonius, writing some 80 years after the emperor's death, as a raving, maniacal, self-obsessed narcissist. Whether or not there's a modern parallel, the fact is (as confirmed to us by Professor Mary Beard of Cambridge University) Caligula didn't actually appoint a horse as consul. So this is 2,000 year-old fake news. There are theories that Caligula may have been so contemptuous of the political class that he may once have said a horse would have done a better job (his favourite animal was famously fed on oats mixed with specks of gold).
As a gesture of political contempt, sending a horse out to talk to the press suddenly seems a rather fine, Trumpian gesture. The odds? 5,000/1. Those are the same odds as those offered on Leicester City winning the Premier League a couple of years ago... Sadly, Professor Beard didn't express an opinion on whether she thought it a good bet. But if you're a gambler, you could put your money on now, then find the ear of the man in the Oval Office. Who knows? He might just do it...
- Odds on a 1987-style massive storm in the next 20 years - one that precipitates a stock market crash?
You'd need a definition of how big the storm would be and then what constitutes a "crash". The chances of a storm like that in the UK within 20 years are probably quite high.
- Odds on one of Boris Johnson's children becoming Foreign Secretary in the UK government?
- Odds on Donald Trump "doing a Caligula" and appointing a horse as White House press secretary as a gesture of political contempt?