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Peer to Peer Lending and HMRC Debt

Date Added: 28/01/2016  

Peer to Peer Lending is an increasingly popular method of borrowing for businesses, especially given the perceived post recession reluctance of the main high street banks to lend at the level the government would like. But is it a sensible form of borrowing to undertake if it is used to pay off HMRC Debt? Despite the many appealing benefits of Peer to Peer lending, this article argues that caution should be exercised if the loan is used to pay HMRC debt.
 
Why does Peer to Peer lending sound a good way of paying off HMRC Debt?
 
In our experience, many businesses experience times when they are struggling to pay HMRC Debt – PAYE, VAT, Corporation Tax – on time. Quite often this might be due to a temporary cash flow problem, perhaps a late payment from a supplier or waiting for the fruits of a new order to come in. If this is the case, and the overall prospects for the business look good, then a Time To Pay agreement with HMRC is the easiest solution.
 
However, it’s when the amount owed to HMRC is growing, is more long term and perhaps even the prospects of business growth aren’t enough to pay, that more radical solutions need to be sought. It is a legal requirement to pay HMRC what they are owed (Crown Debt is another name for HMRC Debt and gives a clue to how seriously non-payment is taken). Under these circumstances, Peer to Peer Lending to help pay off HMRC, can seem attractive, because:
 
·         The Speed of the Process. The process is almost exclusively on line and can take as little as a week or two for approval. With the banks, this can take longer.

·         Interest Rates. Interest rates can be more competitive than the banks, leading to a perception that the loan will be cheaper using the peer to peer route.

·         Repayments are usually Fixed. No need to worry about rising interest rates and there usually aren’t any penalties for early repayments.

·         Security and guarantees. Peer to Peer lending tends to require lower levels of security and personal guarantees than banks.
 
All sounds good doesn’t it?
 
So what are the down sides to Peer to Peer Lending?
 
As is often the case, there is a potential downside to all of the upsides mentioned above.
 
·         Just because the process is quick and might have less onerous security requirements is no benefit at all if a business is saddled with a borrowing debt that it can’t really afford.
 
·         Interest rates with Peer to Peer lending might not be lower than the banks. It might be quicker and easier to get the loan, but if the analysis of the borrower’s history is classed as riskier, then although the loan might be approved, the interest rate might actually be higher than what a bank would have offered. In which case, again, the loan’s repayments might actually be more than the business can afford.
 
·         Also repayment periods tend to be shorter with peer to peer lending, pushing up the size of monthly repayments.
 
·         Finally, although the levels of security and guarantees required are typically lower than those asked for by the banks, it is not uncommon for a director’s personal guarantee, often involving personal assets, to be asked for.
 
Under these circumstances, it is easy to see that whilst you could get the loan your business needs to pay off HMRC, you could also be saddled with a loan the business can’t actually repay.
 
As with any other loan, a peer to peer loan still needs to be paid off in full and on time. If the business cannot stick to its repayment commitments, then the consequences can be serious as the peer to peer lender will seek full repayment under the terms and conditions of the loan. If you have made personal guarantees, then action can be taken against you personally, meaning you could end up losing your house.
 
So what is the alternative to Peer to Peer Lending to pay off HMRC Debt?
 
Clearly if a business is struggling to pay HMRC debt, and a Time to Pay Agreement isn’t the solution, then you need to take action because the likelihood is that the business is trading insolvently, and this is not a situation where borrowing from peer to peer lenders is a good idea, however attractive it might sound.
 
We are business turnaround specialists, helping businesses to recover when they are facing financial problems, including HMRC Debt. We will work with you to find the best possible solution for your business.
 
Alternatives to Peer to Peer lending include: asset financing or commercial funding. We know the right people to go to for your business’s specific circumstances. If however the position is more serious and you are facing a winding up order, then options include a Company Voluntary Arrangement, Administration or Liquidation, all of which help address the problem, which borrowing from peer to peer lenders doesn’t.
 
So, if you are considering a peer to peer loan for your company to pay down HMRC debt, but aren’t sure if it’s the right way to go, then contact us or call us now on 0800 902 0123 for a FREE initial chat. We offer honest, pragmatic advice on the best options for you and your business.

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