“What you see is what you get”. That’s what the world of alternative finance wants you to think about its costs. Many platforms have vowed never to hit their lenders with extra charges before they have even earned a penny.
But is this really true? We take a look at established players in peer to peer finance and crowdfunding to see whether their claims stack up, and what the true cost of investing and raising capital is likely to be.
A fee by any other name
Upfront fees are rarely described as such in crowdfunding literature but it’s well worth scrutinising transaction, arrangement and listing fees as variations on this theme. The P2P platform Money&Co, for instance, charges businesses a £50 application fee and a £100 listing fee once all the details of the application have been processed.
P2P investors will also see their returns adversely affected by charges, but these are not noticeable because they are factored into the ‘headline’ rate advertised on the site. For instance, Zopa now deducts a loan serving fee from repayments made by borrowers, amounting to 1 per cent annually, and this is reflected in their interest rates (currently 3.8 per cent for 2 and 3 year loans, going up to 5 per cent for 4 and 5 year loans.) The same goes for Funding Circle, which deducts 1 per cent from monthly instalments before paying investors its current annual return of 7.1 per cent. So these immediate fee deductions are not obviously felt by the investor, but that does not mean they aren’t there.
A spokesman for Ratesetter maintained that its customers can invest funds without incurring any investor charges or fees. In reality, the rates being offered have already seen 10 per cent sliced off in fees. This has not stopped the site offering reasonably competitive rates, now standing at 4 per cent loan over one year, 5.1 per cent over three years and 5.5 per cent over five years, but it does raise questions about the kind of returns investors could be enjoying if providers chose to take a smaller cut. Investors who wish to withdraw their money quickly from peer to peer platforms can also expect to pay between 0.25 per cent and 1 per cent as a sale loan fee.
The price of success
On many crowdfunding platforms, investors do not have to pay any charges, with Syndicate Room and Crowdcube being the two most high profile examples. But there are exceptions. On Seedrs, investors are charged 7.5 per cent on profits, with the figure rising to a huge 20 per cent on VentureFounders.
For businesses hoping to raise capital, there are a whole host of costs to consider. Entrepreneurs can usually expect to pay a percentage on the total funds raised should they hit their target – known as a ‘success’ fee. Seedrs even has two different baskets of success fees, depending on how well you know your investors. Funds raised from your own network (i.e. friends, family, customers etc) incur a 3.75 per cent fee, which goes up to 7.5 per cent for everyone else. This works out at roughly 5 per cent business. According to Seedrs, this fee includes “absolutely everything that has to do with the investment”, including legal and secretarial admin services, filing paperwork for Seed Enterprise Investment Schemes and Enterprise Investment Schemes, investor admin as nominee, issue of share certificates and payment processing.
Crowdcube also charges a success fee of 5 per cent, but this does not include the services mentioned above. Businesses have to pay an extra administration fee of £1,250 for drawdown of investor funds, issuing of digital share certificates and filing for SEIS/EIS if applicable, as well as a corporate services fee of £1,250, which covers any legal costs. For mini-bonds successfully raised on the platform, there is a legal and admin fee of £5,000 as well as a 0.5 per cent annual admin fee for the ongoing interest payments to investors. As for SyndicateRoom, an upfront legal review will cost businesses £1,500 and a 5 per cent success fee can be expected if things go well. Venture Founders, however, only carries a 3 per cent portfolio monitoring fee on total funds raised, which covers three years.
The reality is that while upfront fees are becoming a rare occurrence among the major platforms, there are various costs to consider on BOTH sides of the equation. For the most part, charges are transparently stated and easy to find on providers’ websites, but differences in charging approaches can make like-for-like comparisons tricky. As with so much in financial services, the cheapest possible platforms would in no way guarantee the best possible service, technology and due diligence, but investors and businesses are duty-bound to understand the full financial implications of successful crowdfunding, and how much charges are likely to eat into seemingly juicy returns.