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Author: Sacha Bright & Oliver Murphy
But being able to offer the coronavirus business interruption loan scheme as part of an Innovative Finance ISA (IFISA) would benefit both lenders and small- and medium-sized enterprise borrowers.
Speaking on the merits of IFSAs, Nicola Horlick, chief executive of Money&Co said that having a government guaranteed loan in an IFISA would be attractive and might encourage people to invest in loans that would help businesses impacted by the pandemic.
An Innovative Finance ISA lets you use your tax-free ISA allowance while investing in peer-to-peer (P2P) lending.
Peer-to-peer lending matches up investors, who are willing to lend, with borrowers, who could be individuals, businesses or property developers.
It works by lending your money to borrowers in return for a set amount of interest-based on the lengths of time you are prepared to leave your money untouched.
You can pay in up to your ISA allowance, which is £20,000 in the 2020/21 tax year, running from 6th April to 5th April.
Because you’re cutting out a bank by investing your money through an online platform - peer-to-peer lenders - you tend to earn higher rates of interest than a traditional savings account.
If people are putting money into an IFISA to invest into loans to businesses, and the government guarantees the capital, that would encourage private investors to lend. It would also support the P2P industry and allow them to compete with banks of whom have the benefit of the financial services compensation scheme which guarantees deposits up to £85,000.
The recent cut in interest rates means many savers are receiving little or no interest on their savings. Indeed, NextFin has reported that there is £60bn invested in cash ISAs at present, receiving little or no interest.
At present, independent financial advisors across the country are reluctant to recommend investment in P2P platforms because savers’ money is at risk.
But if the government were to offer CBILS 100% guarantees for small businesses via P2P platforms the interest that is paid by the businesses would transfer to the savers that have invested in an Innovative Finance Saving Account (IFSA) which has the same tax relief as ISAs and would mobilise billions of pounds of private investment into small businesses.
In essence, two problems would be solved at once: putting income back into the pockets of savers, while also getting money to businesses at risk of going under. Indeed, this is a way to mobilise private investor’s assets, and not as much government money, as a way of shielding businesses from the economic impact of Covid-19.
Disclaimer
To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
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