It will come as no surprise to a lot of investors and people in the finance sector that on the 24th May 2019 the peer to peer lender known as “Lendy” went into administration. For all the negatives Lendy have left us with, they also have to be acknowledged for the successes they achieved, in particular being an innovator in a new sector and although the growth of its business was seen by many as its biggest success it was also seen as their undoing.

It is reported that Lendy currently have £160M on loan with an estimated £90M in arrears, I am sure you will agree this is an enormous default rate that is clearly not sustainable and led to the instruction of administrators.

Although this may have been the feather that broke the camel’s back, I have looked through the company’s history to see if there was any signs of the potential issues and what we have learned from the business model. I appreciate it is always easier to look back at a situation but this blog has not been written to do this, instead it has been written to learn from others and to be successful in the peer to peer sector that we all love and believe in, and to also protect our investors.

Rapid growth
I believe this is one of the first and more obvious places to start, the timeline provided by Lendy on their own website shows the intense growth they received from doing their first loan in 2013:

Year : Amount Lent
2013 £30,000
2015 £32M
2016 £100M
2017 £300M

By any businesses’ standards, this is incredible growth and all company owners will know that with growth comes infrastructure problems. Even simply recruiting and training staff, developing systems and workflows to maintain high standards becomes a huge strain, particularly when you are hitting growth at this level.

There are peer to peer providers that have done this differently including ourselves, Crowd Property and Assetz Capital who have all achieved fantastic growth but maintained standards.

At Sourced, we have capped our funding in 2019 to give us time to review, adapt and improve after each fund, this will create the foundation for growth whilst maintaining our high standards and delivering returns to our investors.

Borrowers
It became clear in 2018 that Lendy were in serious trouble when they called in the FCA to support them as a borrower threatened to pursue them for a £10M claim.

The lending market is a relatively small circle of serious lenders and professional people, it became a regular occurrence of disbelief when I have met others in the industry and discussed projects that they had declined to fund, as the borrower was inexperienced, yet Lendy had funded the project.

I have to say this is a difficult subject for all lenders not just peer to peer and I have often heard it being referred to as an art rather than a science.

This is one of our key advantages of any lender in that we don’t lend monies to anybody outside of the Sourced Network, there are two key reasons for this:

1- Our borrowers haven’t just simply completed an online form or created a CV. Sourced know them personally, we have a relationship with them and have provided support and training to help them, assisting them with securing and developing the project.

2- Having a relationship with our borrowers means we know what experience and level of project is achievable for them which reduces the risk to our investors’s monies.
If anyone in our network wanted to develop 50 apartments but hadn’t yet completed a simple refurbishment, we wouldn’t even review the application.

Knowing your borrowers is important but having a relationship with them is on a whole new level, it makes the transaction more transparent.

Transparency
I mentioned this in my earlier point about borrowers, a key element that wasn’t transparent with Lendy was the level of arrears. It was reported that when the FCA were called in to deal with the threatening borrowers, the FCA uncovered that Lendy were only recording loans as arrears until they were over 180 days. At the time, Lendy were posting a 12% level of arrears, the FCA found that 62% of Lendy’s loan book was in arrears by over one day.

This not only affects Lendy, but it clearly shines a bad light on the industry and had they been open and honest about this, perhaps before it got to this level they could have introduced better systems or controls, points I refer to earlier when dealing with growth.

As a result of this, similarly other peer to peer lenders, Sourced have live feeds for relevant statistics to help investors make informed decisions but also to help us as a business reflect on the performance of our loans.

Summary
We can learn a lot from Lendy and no doubt, as the sector develops systems will be improved and risk reduced. Unfortunately, there will be investors that will suffer following the appointment of administrators and this will probably lead them to withdraw from the peer to peer sector which is a huge shame.

Peer to peer lending was created to replace the banks, giving investors more control, better returns and more transparency and I believe this is happening. I know myself and my team strive to achieve this every day as do others that support, develop and love the sector.

Peer to Peer Lending (also referred to as P2P or P2B – Peer-to-business) is the practice of borrowers taking out loans from individual investors who are willing to lend their own money for an agreed interest rate. It has become so popular in recent years (thanks mostly to poor returns and strict lending criteria from high street lenders), that today it can almost be considered a mainstream method for investors to earn better – rates of return.

An example would be Joan with £1000 to invest.

Understandably, Joan is keen to get more than the two per cent interest she is being offered by her high street bank for putting the money into a savings account. Instead, she invests the money into a Peer 2 Peer Lending Platform, which offers her an agreement of eight per cent return a year. That’s a huge six per cent increase on the savings account figure, meaning she will receive £80 on her loan investment, compared to the £20 with the savings account. Although Joan must remember that P2P lending carries additional risk, in comparison to a savings account.

There are many different types of Peer 2 Peer platforms in the UK. These can cater for different types of borrowers and offer different levels of security and returns for investors. Some borrowers will lend money to complete building projects, for instance, or to buy a new car. Security on the loan varies, and comes in the form of other assets, such as where the property is used as collateral.

More often than not, the riskier the loan, the higher the rate of return. For instance, Greg is a builder and is looking to borrow £100,000 to complete a house on a piece of land that he owns. He intends to sell the house for £150,000 once complete.

But Greg has struggled to raise the money he needs for the house from his high street bank. So, instead, he has turned to a Peer 2 Peer Platform to borrow it. This is agreed with the proviso that he is willing to pay investors a 10 per cent interest rate for a 12-month loan. The conditions also assert that he gives the investors a first legal charge over the land as security. This means the investors would jointly become the landowners, should Greg default on the loan and fail to make repayments.

Peer 2 Peer Lending is regulated in the UK by the Financial Conduct Authority (FCA), whose job it is to ensure every platform operates according to strike regulations, particularly in regard to the protection and treatment of client money and to ensure each loan opportunity is legal and transparent.

Pros of Peer 2 Peer Lending
● Peer 2 Peer lending can start from as little as £10
● There are a variety of loan terms and returns for investors with different risk appetites
● Peer 2 Peer platform providers often have strict lending criteria and undertake thorough due diligence on all investment opportunities and on borrowers – which can give comfort to investors using their own money
● Investors often (but not always) receive regular interest payments, either monthly or quarterly and in proportion to the amount they have lent

Cons of Peer 2 Peer Lending
As with every type of investment, Peer 2 Peer Lending carries risks. There is no guarantee that an investor will be repaid the money that he or she has lent to a borrower via the platform – to the extent they may lose the entire sum of their investment. That’s because borrowers might be unable to pay back the loan, and the funds an investor lends through a Peer 2 Peer platform are not covered by the government-backed Financial Services Compensation Scheme (FSCS).

Tips for investing in Peer 2 Peer Lending
Before committing to loaning money on a Peer 2 Peer platform, every investor should do their own thorough due diligence. Investors should try, where possible, to reduce their exposure to one type of lending opportunity or borrower. In fact, this diversification tactic is a popular practice among seasoned investors.

Want to invest in property – but without the hassle of physical bricks and mortar asset to look after? Then investment ‘vehicles’ such as Peer to Peer lending and Crowdfunding is exactly what you’re looking for.

The two sound similar in that both offer ways of investing in property in a hands-free manner i.e. you provide the funding and someone else does the buying, makes sure the project runs smoothly, carries out the admin etc. All you have to do is sit back and wait for the returns. Sound simple? That’s because it is.

Both Peer to Peer Lending and Crowdfunding have become increasingly popular in recent times. That’s mainly because, firstly, people were looking for better returns than high street banks and building societies could offer post-recession. And, secondly, the new platforms have made it easier for developers and others, such as small businesses, to get a loan in the first place (banks and building societies having severely tightened up their lending criteria).

In fact, so mainstream have Peer to Peer Lending and Crowdfunding become that so far this year around £2.27 billion of finance has already originated through these platforms. The data, supplied by independent research company AltFi Data looks at lending by tech companies such as Zopa, RateSetter, Assets Capital etc.

Peer to Peer Lending explained

This is when you lend money to borrowers (either one borrower or a handful, depending on how the website works). Typically, the loan will be for anything from one to five years and you’ll get interest either at the end of each year or some other agreed time e.g. once the development is complete, together with your original loan).

The higher the level of interest, then obviously the riskier the borrower. However, all Peer to Peer lending sites in the UK are regulated by the Financial Conduct Authority (FCA). This means platforms must adhere to regulatory standards and protect investors’ cash is ring-fenced and can’t be touched by the platform in a segregated client account.

Crowdfunding explained

With property crowdfunding you can become a landlord by using your investment for a part- share in a buy to let, or even funding it outright. It is common for crowdfunding platforms to pay out a monthly income based on your investment in addition to the capital appreciation of the property. The main difference to P2P Lending, being that crowdfunding is equity-based rather than debt based. Crowdfunding sites too are regulated by the FCA and again, like Peer to Peer investing, there can be losses as well as gains.

Sourced Peer to Peer Lending model

At Sourced, we offer the ability to invest securely in properties – both residential and commercial – with a return of up to 12%. Like most online lending platforms, we’re able to offer better returns than alternative investments because we’re cutting out the middle-man (the broker).

At the same time, property developers are benefiting by being able to access loans quicker. Borrowers are charged an arrangement fee, while investors pay a monthly servicing cost.

Investors receive capital repayments at the end of the loan term along with interest rates repayments. If a borrower defaults on a loan, Sourced will act on behalf of the investor in an attempt to recover their funds.

As with any kind of lending, an investor’s capital and unpaid interest is at risk of default, and investors should ensure they have satisfied themselves of the risks and should never lend more than they can afford to lose.

Find out more about our Peer to Peer Lending scheme at our website: www.sourcedcapital.co or give one of the team a call on: 0333 9009 999 today.