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Do ISA Bonds Make Wellesley Lending Less Safe?
Some P2P lending companies, like many businesses do, have been borrowing money.
They might have borrowed as part of their start-up costs and they have certainly been borrowing for expansion.
When a P2P lending company borrows money, it takes on risk. If its growth plans fail, it could struggle to repay the borrowed money and therefore collapse.
If a P2P lending company collapses it's not necessarily the end of the world for lenders like you and me, and not even probably the end of the world.
They are now expected to have a trustee and processes in place to run down their loanbooks, repaying lenders like you and me, even after the P2P lending company itself is dead.
But it is an extra risk, and a potential extra layer of costs, that could impact the amount of money you get back at the end of the process.
Now I want to look specifically at how Wellesley & Co. has just started borrowing through ISA bonds. And previously, it was also borrowing through mini-bonds. Does this impact how safe it is for us individual P2P lenders?
You might also want to read Neil's earlier piece: Wellesley's P2P ISA Bond is Not P2P Lending.
Wellesley is borrowing from people like you and me
Wellesley is about to borrow a lot of money from ordinary people like you and me. Go to its website, click through, fill in some forms, and you could lend Wellesley some money through its ISA bond. It has already been borrowing from us through mini-bonds.
With these bonds – that's Wellesley you're lending to, not directly to lots of borrowers through individual, mini P2P lending contracts. The buck stops at Wellesley.
Wellesley obviously thinks it can raise more money, more cheaply, by borrowing from individuals like us than in going to banks, investors or other lenders.
But my article today is about the impact on those of us who stick to P2P lending through Wellesley, rather than its bonds.
One positive of the bonds from our perspective is that it brings Wellesley's borrowing out into the open. Most people lending their money through, say, Funding Circle probably don't know how much money its borrowing from banks or others, for example. They won't have paid the £1 fee to download that information from Companies House.
Wellesley is borrowing to lend
Also, unlike its competitors, Wellesley has been borrowing in order to lend more to more borrowers. This is an interesting reason for it to be borrowing money!
It hasn't been borrowing to improve its technology, hire more staff or to find new sources of borrowers for individual P2P lenders on its website. That's what the other P2P lending companies have been doing.
Also relevant here is that, according to my colleague Neil, Wellesley has three companies all involved in the Wellesley & CO. website and which would go bust and which would be a risk to you and me is a point that needs exploring, but I'm not ready to disentangle the companies today. I can't read a 135-page report at this time of night!
Put it altogether
To be honest, I don't know what all that means. There are a jumble of ways you can interpret all of that and you could put positive and negative spins on it.
All I intend to do is continue to assess the financial soundness of Wellesley by its accounts, much like I do for the other P2P lending companies.
If you read the end of the ISA bond prospectus, you'll see that it is in very sound condition in terms of profits, its assets and its cashflow.
In addition, Wellesley claimed in an email to now have £9 million, including its bad-debt provision fund, ready in reserve to support ISA bond and P2P lending customers.
Read more: Wellesley's P2P ISA Bond is Not P2P Lending.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Wellesley & Co., and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.