A peer-to-peer website has been rescued after falling into administration, offering a lifeline to 900 savers who faced being unable to get their cash back.
Funding Knight was promising investors returns of up to 12pc for lending cash to small businesses.
Many feared that they would lose their money when the company ran out of cash and went into administration last month.
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However, last week the firm was rescued by GLI Finance, an investment firm, which said savers cash was safe and could be withdrawn at anytime. GLI has also invested a further £1m in the business.
Earlier this year the government announced that savers could get peer-to-peer returns tax-free inside new Innovation Isas. Firms must meet criteria set by the City Watchdog, the Financial Conduct Authority, before they can offer P2P inside an Isa.
How does peer-to-peer lending work?
It is a way for individual borrowers and lenders to work together, bypassing traditional banks.
The idea is that each party gets a better rate: lenders receive more interest than they would get from a bank savings account, while borrowers pay less than on a bank loan.
Savers decide how much they want to lend and over how much time, usually three to five years.
Each site works slightly differently, some will let you choose who you lend to and what rate you get, depending on how much you have and how long you want to put it away for.
Others will divide up your cash into chunks and spread it among borrowers to reduce risk.
Some will pay interest annually, while others will pay it at the end of the agreed term.
Is it safe?
Despite Funding Knight savers being assured that their cash is safe by the new owners, the incident has raised concerns over the safety of peer-to-peer lending.
Any funds they lend through a peer-to- peer website are not covered by the government-backed Financial Services Compensation Scheme (FSCS), which protects bank savers up to £75,000.
This means that if a borrower does default then you could lose your cash, as a lender.
Some companies have tried to reduce risks by setting aside cash as a reserve which can be used to repay lenders for unpaid debts, but there’s no guarantee that these funds will pay out.
Justin Modray, founder of Candid Money, an advice website, said: “Peer-to-peer losses haven’t been a big problem to date, but then they’ve been operating over a fairly favourable period.
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“If our economy struggles and borrowers start to feel the squeeze then we could see bad debts rise and peer-to-peer lenders lose money, no doubt causing some sleepless nights.
“The bottom line is that it’s vital to fully appreciate the potential risks of peer-to-peer lending across varying economic cycles and I suspect many lenders don’t.”
A spokesman for the Peer-to-Peer Association, a trade body of which Funding Knight is not a member, said:
He said: “We have been consistent in calling for, and embracing, regulation of the sector and requires robust adherence to its published operating principles, including the publication of platform loan books in full and clear information on all fees and charges to investors and borrowers.”
“Peer-to-peer lending offers overall a lower risk profile than some other forms of investment with less volatility, but it is not entirely without risk.
“Within the peer-to-peer lending sector, there are a number of different asset classes each with their own risk-return profile.”