The Risks of Investing
All investments involve risk as well as the potential for reward and it is important that investors understand the risks involved with peer to peer (p2p) lending in general and the particular risks associated with social lending brought to you by Community Chest. Please make sure that you also read the ThinCats section on risk and take into account the following factors:
Loss of Tax Relief
If the borrower ceases to qualify for tax relief because of a change to the nature of its business you could lose the tax relief you have enjoyed. The Loan agreement will seek to restrict the borrowers ability to make such changes to its business unless it pays compensation to lenders for their loss of tax relief.
Inability to repay at the end of the loan term
Community Chest loans involve a 'bullet repayment' of capital in a single lump sum at the end of the loan and it is possible that the borrower's cash flow will make that difficult. We will be seeking to monitor that situation and deal with potential problems early.
Neither Community Chest or ThinCats offer any advice or recommendation. We would recommend that you take advice from an independent financial adviser before committing your funds to ensure that you fully understand the risks and are satisfied that peer to peer lending is appropriate for you, and meets your needs and personal financial circumstances.
No compensation scheme arrangements
Peer to peer lending is not the same as a bank or building society savings account. When making a peer to peer loan the capital you lend to a borrower is not protected by the Financial Services Compensation Scheme in the event of a loss. Bank and building society deposits are protected by this scheme in the event of fraud.
Peer to peer lending involves lending your capital to one or more businesses in return for a fixed rate of interest which you have agreed at the time of the lending commitment. Remember, you are lending to a business and therefore your capital is at risk and ongoing interest payments are not guaranteed if the borrower defaults on capital or interest payments. Community Chest loans differ from other ThinCats loans because they MUST be unsecured in order to attract the tax relief that is a key feature of the deals.
It is important to remember that any references on the ThinCats website to historic default events or loan default rates are not indicative of the default rates that will be experienced with Community Chest loans. This is an innovative scheme and we do not yet know what default rates can be expected.
Some p2p platforms such as ThinCats operate a 'secondary market' to allow investors to sell their loans early if they need the cash. Community Chest loans cannot be traded on a secondary market because the important tax relief would be lost. This makes Community Chest loans particularly illiquid and you will be forced to keep the loan for the full term of (normally) 3 years.
Although the rate of interest which a business borrower has committed to is fixed at the outset of the loan, it is possible that financial difficulties faced by the business borrower may mean that the loan will need restructuring which may mean you need to accept a slower repayment or a different rate of interest in order to have greater certainty that your capital will be repaid.
ThinCats has put arrangements in place to protect your money in the event of platform insolvency. Arrangements are in place with another FCA regulated firm to take over the administration of the loans if necessary to ensure repayment of interest and capital to your client account as normal.
Community Chest loans are only made to UK businesses and the borrower’s ability to repay the loan could be affected if there was a downturn in the UK economy. The viability and sustainability of borrowers’ business models is of course fundamental to the level of risk involved. Further information about the risks associated with each deal will be included in the Information Pack.