Alternative lenders are plugging the funding gap: but where does tax fit in?
In the wake of the financial crisis many companies, especially small to medium sized enterprises (SMEs) and ‘start - ups,’ have been struggling to gain access to the funding they need to execute their business ambitions. However, this has created a need within the market and where there is a demand, it’s not long before a supply is found. Alternative lenders, such as online loan services and peer - to - peer lending are on the rise in Europe and the rest of world. This trend and the consequent tax implications were discussed at the Taxand Global Conference in Milan.
The way banks lend has changed. After the financial crisis, legislators and governments across the world cracked down on the banking industry demanding that they introduce more stringent lending criteria, forcing banks to shut the door on many companies hoping for a financial help when they needed it most. However, it wasn’t just the law makers’ call. Banks had a dire need to fix up their balance sheets which were riddled with toxic debt. They had no choice but to constrain their balance sheets to reduce future risk.
However, as confidence within the global economy is slowly being restored, corporations are once again looking to expand their business through acquisitions and investment. SMEs, entrepreneurs and start – ups are hungry for growth and there is a well-known shortage of funding for these companies. The answer? Alternative lenders. In the US alternative lenders have always been popular, accounting for 80% of the market, but now they are spreading over Europe and other parts of the globe.
The repo (short term loans) market in the US is worth $2.6 trillion. With banks retreating from the market by 28% over the last four years, and a Barclays report predicting that that will decline by 20% further, it creates a very large market which private equity and pension funds can’t fill, opening up further opportunities to alternative lenders.
Crowd funding websites around the world have provided billions of dollars’ worth of small loans to cash starved companies with better rates than the banks. However, now it is clear there is money to be made, alternative lending is attracting more mainstream players from the financial services industry, even banks themselves.
One of the main repercussions, and some may say benefits of this trend, is the greater competition between lenders, allowing companies more choice in who they borrow capital from and the opportunity to achieve a competitive deal. However, what remains less obvious to most corporations is the tax implications of alternative lending, which varies across the different parties involved: lenders, borrowers and investors.
For example, in mainstream lending there is often an obligation on the borrower to withhold tax when making an interest payment. There is usually a tax relief regarding this rule for payments to most mainstream banks, so if a company borrows money from a typical institution they won’t have to pay this: an alternative lender on the other hand, it could be a different story.
Non-bank finance is a different game and therefore the usual tax rules don’t apply. Over the next 12 months, alternative lending is predicted to increase and it’s vital for companies, lenders and investors alike to pay attention to shifting regulations to ensure they are not landed with an unexpected tax burden.
Your media contact for further queries is:
Barnaby Fry, MHP
T. +44 (0)203 128 8215
Quality tax advice, globally
- Borrowers - Take control and explore your financing options (but remember tax!)
- Lenders – Reassess your offering and evolve as necessary (but remember tax!)
- Investors - Proceed with caution (and remember tax!)
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