Insolvency reforms bring secured loans into focus

THE TYPE of security taken by some peer-to-peer lenders has come under the spotlight amid proposed insolvency reforms.

Chancellor Philip Hammond announced in his 2018 Budget last month that HMRC would return to preferred creditor status in business insolvencies to ensure tax is collected. The taxman previously had preferred status but it was removed in 2002.

The reform puts HMRC ahead of creditors that have a floating charge as security, which could include some P2P lenders.

Rural P2P business lender Folk2Folk said it does have floating charges in some cases, but also takes a fixed charge over land or property which takes first priority on a creditor list.

Read more: Everything you always wanted to know about tax but were afraid to ask

“In some circumstances we take a debenture in the form of a fixed or floating charge as additional security and may also take directors’ guarantees on a loan to a company,” a spokesperson said.

Others take different approaches. Funding Circle said it has floating charges on a small minority of its larger loans but as most of its business is unsecured, it tends to focus on holding personal guarantees, which means they can pursue a company director or whoever is a named guarantor.

Read more: Are P2P investors better off selling bad loans or relying on recovery?

Rather than a security, RateSetter takes ownership of an asset as part of its business lending. Some believe the insolvency reforms may present an opportunity for P2P lenders.

“The significant issue will be the banks’ response and whether HMRC’s upgraded status will further dampen appetite to lend to small firms,” said Stuart Lunn, chief executive of Edinburgh-based P2P business lender LendingCrowd.

“This is potentially a significant opportunity for alternative lenders to gain market share, as they can step in when banks are unwilling to lend.”

This article featured in the December issue of Peer2Peer Finance News, now available to read online.