The Chancellor announced in his Budget this year that the government was going to make it possible to hold loans to small private companies in the new Isa (Nisa). A consultation period is ongoing – with a detailed Treasury paper just released - and it is hoped it will soon be possible for investors to do this.
Why invest in small company loans? One major reason is that returns on cash are pitifully low as interest rates continue to remain at historically low levels. This evening, there will be £1.4tn of the nation’s money sitting on deposit at banks and building societies. The majority of it will be earning less than 1% as an annual rate of interest. The very best that you can get from a long-term deposit account is 2.6%. By contrast, investors in small-company loans can receive a gross return of around 8%, which reduces to 7% after fees.
Beyond the benefit of getting a higher yield on your cash, an investor in small-company loans is also helping to keep Britain’s fragile economic recovery going. Small and medium-sized companies need our support: they employ 58% of those working in the UK’sprivate sector.
The ability to place small-company loans in a Nisa could result in a large flow of funds to this important sector of our economy. The new allowance is £15,000 per person, and this can be invested in cash or stocks and shares. The addition of small-company loans to the permitted asset list will be very welcome to those seeking income. Under the old savings account regime, the allowance for cash Isas was significantly lower than that for stocks and shares Isas and yet two-thirds of the market was for cash Isas. It appears those investing via this route favour lower-risk investments.
The big question, therefore, is how risky are loans made directly to small companies? I run a crowdfunding platform called Money&Co., which allows people looking for a better return on their cash with creditworthy companies that need to borrow. I have been impressed with the quality of the companies that have come forward to seek borrowing through our platform. We have a team of credit analysts who scrutinize the information provided by each company very thoroughly before deciding if we can help. They then attribute a credit rating to each company that is approved, which provides guidance to our lenders on what rate the company should pay in interest.
One important point to make is that money left with a UK onshore bank will be protected should the bank run into difficulty. If a company goes bust, a lender will potentially lose a good part of his or her money. However, there are many strong companies out there that need cash to fund their growth and this is an interesting investment area, which will be made even more attractive by the inclusion of these loans in Nisas.