What is the Crowd2Fund IF ISA?
If you want a tax-efficient way to save, then an ISA is normally the first port of call. I was contacted recently by Crowd2Fund about their Innovative Finance ISA; IF ISA for short. So what’s it all about?
Before I launch into anything here, I should start by saying that the golden rule of saving is to do your own research! Nothing written here should be taken as a recommendation or advice.
Why do I need to say that? Because the IF ISA is not a cash ISA. It’s based in stocks and shares, which means that there are risks involved (so, therefore, you could get less out of your IF ISA than you put in). However, with risk comes reward, and as a result, the expected return is higher than you’re likely to find in a High Street cash ISA account.
Last year I wrote about Nutmeg’s investment platform. I put some money into a fairly risky portfolio with them and - truth be told - have lost money. But as anyone knows, you have to be in these things for the long run, so there’s no panic here from me just yet.
Crowd2Fund are named as “one of the UK’s most progressive crowdfunding sites” according to UK Investor Magazine.
What is an Innovative Finance ISA?
The Innovative Finance ISA is a new product but the normal ISA rules apply to it.
Under the current regulation, each individual can Invest up to £15,240 in an ISA in the 2016-17 tax year.
Unlike previous years, this can be split any way you see fit. If you wanted to, you could invest the whole £15,240 into an Innovative Finance ISA, or you could put part into a cash ISA and part into an Innovative Finance ISA. In fact, you can do it in any combination you can think of (including stocks and shares ISAs).
One thing that hasn’t changed, though, is the fact that if you choose an Innovative Finance ISA, you can only be invested within with one provider at a time each tax year.
So what does the IF ISA offer? You may want to sit down for this one.
A whopping 8.7% APR!
How do Crowd2Fund offer such a high APR?
How do they offer a rate so high? The simple way to explain it is that they allow consumers to lend directly to businesses seeking loans which cuts out often costly middlemen.
The Crowd2Fund IF ISA is part of the market for alternative finance. This is essentially things like crowdfunding and P2P lending, and it’s a market that grew by 84% to £3.2 billion last year.
But you’re still thinking about that massive return, aren’t you? Me too, so let’s have a closer look.
Crowd2Fund are quick to offer a breakdown of the estimated 8.7% APR on their website.
The Crowd2Fund credit team works to handpick opportunities for investment, going so far as to try and obtain security or director guarantees for each loan. Each investment is then spread across several different borrowers which is done to reduce risk.
If one of the borrowers doesn’t repay, the debt incurred is then taken off of any potential return, hence why the APR is estimated rather than exact.
How often do borrowers not repay? Not that often, according to the figures that Crowd2Fund publish. Non-payers will always be around, though, but the whole idea around spreading your investment is to minimise that risk.
As I write this (early July 2016) the actual gross APR for the 12 months to May 16 is 9.14%.
Speaking to Crowd2Fund’s CEO, Chris Hancock
I dug a little deeper, speaking to the CEO, Chris Hancock, about his company’s IF ISA.
I asked more about the loans that the company makes and who they lend to. The answers were short but simple.
The average loan size is £110k and the average investment size is £4k. The loans are invested into “the UKs fastest growing, innovative and recently profitable businesses”.
When I asked about the APR, Chris was also quick to point me towards their APR analysis, which I’ve already looked at above. Pushed further, I found out that the APR is monitored and amended according to how well or poorly the performance of the loan book is doing. Good news if you’re looking to invest as you’re always getting an up-to-date projection.
How often can you open an ISA?
The concept is if you open an Innovative Finance ISA with Crowd2Fund in the first year, you can only open another Innovative Finance ISA in year two with a different provider.
It is still possible to transfer between Innovative Finance ISA providers in the same tax year, but you couldn’t invest into two Innovative Finance ISAs at the same time. The same rules apply to other types of ISA.
The last thing to bear in mind is that these products are opposed to savings products, so you don’t benefit from FSCS cover. Capital is at risk, but with that risk comes substantially better returns.
In short: If you’re happy to risk losing money, you stand to make more, but the Innovative Finance ISA should be viewed as an ISA for those who like risk, not for those who want a guaranteed return.
As always, my opinion does not constitute advice, and you should always seek professional advice from an IFA if you’re not sure what you’re doing!
Visit the Crowd2Fund website to see more detaiils of what they have to offer.
This is a collaborative post.