Why local lending can be a wise investment

When you have some spare cash to put aside – be it a lump sum or a regular monthly contribution – the biggest decision is normally whether to opt for a bank account or some form of investment.

While deposit accounts offer guaranteed interest, interest rates for the past decade or so have been at historically low levels, often well below inflation. This has led to more of us choosing to invest our capital into companies in the hope that – by taking on a bit more risk – we’ll benefit from significantly higher returns.

But when it comes to selecting an investment, the choice is vast: the growth in the asset management industry means that today it is practically just as easy to take a stake in a Chinese copper mine as it is to buy shares in British Airways or BT.

But investment isn’t always about making a quick buck or trying to back the right company. Over the past few decades, more and more people have started to use other criteria when choosing businesses to invest in. In particular, they are taking into account ethical factors, such as, is this company sustainably run or is it involved in activities, such as weapons manufacturing or tobacco production, that I am not comfortable funding?

Investing in ethical opportunities this way does not mean sacrificing profits for principles: rather, it is an opportunity to make money while also contributing to the social good, whether in the form of promoting renewable energy sources or fairer business practices.

And thanks to alternative finance providers, such as Folk2Folk, there is now another compelling option for investors in the UK: the opportunity to fund viable businesses in their local communities. Through the local lending movement that we have established, individuals with £20,000 or more can lend directly to support small- and medium-sized enterprises (SMEs) based in their area.

Not only does this give investors the chance to benefit financially from the success of local entrepreneurs, it also helps to retain money in an area’s economy and thus boost prosperity levels through the likes of increased employment and higher spending.

This is all part of Folk2Folk’s drive to create financially and socially sustainable communities to help the UK advance economically, while also meeting the challenges and opportunities thrown up by Brexit uncertainties.

The money put forward by Folk2Folk’s lender community is lent among local business borrowers and is secured against property that those businesses own – which helps to reduce the risk to investors. Meanwhile, if you lend larger sums of money, your capital can then be spread across a number of companies, again to help diversify and reduce risk.

Annual interest is 6.5%, and lenders’ capital is repaid at the end of the term, which can be up to five years depending on the loan term the borrower chooses.

And thanks to Folk2Folk, interest can be earned free of income tax: under current rules, a Folk2Folk loan of £20,000 can be held in an Innovative Finance Isa with all subsequent interest payments free of tax, and additional Innovative Finance Isas can be opened in later years to help shelter more of your interest earned from tax.

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