UK Bond Network Vs Direct Bonds

UK Bond Network will be the next P2P lending website to be added to the 4thWay^® comparison tables this week.

UK Bond Network is for high-net worth investors or those classed as “sophisticated” only. If that's not you then you should probably look away now.

The most interesting question we had for UK Bond Network is how it's offering differs from buying bonds outside of P2P. (See sidebox to learn what bonds are.)

The most similar investment opportunity we can think of is buying retail bonds through the London Stock Exchange's Order book for Retail Bonds (ORB) at the time the bonds are issued.

Size matters

David von Dadelszen, head of operations at UK Bond Network, told us:

“The most important difference is the size and the consequences of this.”

The UK Bond Network helps individuals lend their money to small- and medium-sized companies in bonds of up to £4 million.

The smallest recent issue on ORB was £11 million, but this is unusually small. The vast majority of the bonds are loans of around £60 million to £150 million from the likes of Ladbrokes and Tesco.

There are very few of them, too. There were just six such bonds listed on ORB in 2014, for example. UK Bond Network is new, so it has also matched few loans so far, but it has a very large market of small- and medium-sized companies to expand into.

Costs

4thWay^® has some rough figures that suggest the costs to individual lenders of lending through UK Bond Network.

Borrowers are paying something like 14.5% APR (including fees) and lenders have so far received 12.17% after bad debts (none).

This means that the total lending costs appear to be around 2.33%. That's the difference between what borrowers pay and what lenders get. Read more on that in There's No Such Thing as “No Lender Fee”.

This puts UK Bond Network's fees as competitive with other P2P lending websites, and it appears to me to be very reasonable.

Unfortunately, I have no figures we can use to estimate the cost of ORB bonds, so I can't do the comparison.

However, it's likely that costs for issuing smaller retail bonds on ORB are prohibitive or we would see a regular stream of them being listed.

If the costs are higher, as I suspect, that's not just the business borrower's problem. It's the investors' problem too, because the business borrower will now offer lower interest rates to compensate for any costs. (You'll likely have to pay stock market trading and other costs on top of that too.)

Risks

Considering the sorts of businesses on ORB and the size of their loans, they are likely to be considerably safer than loans on UK Bond Network.

But the interest rates are far more attractive on UK Bond Network to compensate.

You can expect to get in the region of 2.85% and 5% before bad debts on ORB. At those low rates, you have to wonder why it's worth the extra risks over savings accounts and cash ISAs!

In contrast, interest is around 12% before bad debts on UK Bond Network.

Exiting your loans early

You can buy and sell your bonds on ORB. From June or July, you'll be able to do the same on UK Bond Network.

In both cases, while selling, you could get more or less back than you invested, depending on demand for your bonds. That demand will largely depend on how healthy the business borrower is at the time and what the economy is doing.

UK Bond Network vs other business P2P lending

As far as I can see, the main difference between UK Bond Network and many of its closest competitors in peer-to-peer is, again, size.

This time, UK Bond Network focuses on somewhat larger loans than its competitors, if you exclude property loans that is.

Here's a list of the pros and cons I can think of for UK Bond Network over other business P2P lending opportunities:

Pro: with many loans, you don't have to keep re-lending your loan repayments so frequently, because you get your initial money back at the end of the loan.

Pro: that also reduces costs, since UK Bond Network doesn't have to keep scurrying to find new borrowers to replace the old.

Con: being repaid at the end in one go potentially increases your risks, but so long as you're being paid regular interest then you can have more confidence in the business borrowers. (And some UK Bond Network loans include regular loan repayments.)

Pro: UK Bond Network mostly offers secured loans. Many of its competitors (excluding property loans) offer more unsecured loans.

Pro: UK Bond Network can go well beyond routine checks and spend more time getting to know a business, digging into its financial details, before agreeing to let them borrow. P2P lending websites working with smaller loans can't afford to do that.

Con: on the flipside, it's harder for UK Bond Network to learn from its past record through quantitative analysis, because it will probably take decades to build up enough individual loans to do so properly.

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