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Post by danraj on Oct 18, 2021 13:33:49 GMT
Your website suggests an unsecured business loan interest rate of ~20% to be reasonable. But that's a completely different risk profile and thus proposition from loaning money to your own company where you have total control of repayments. Different risk profiles should return different interest rates. IMO that's the crux of the ethical argument against this product. Loaning to a company you manage mitigates fraud risk, but there are plenty of other risks associated to running an SME right now. If you try to apply for an interest-only unsecured loan, I think you will find it difficult to find a provider and if you do, the interest rate is likely to be around or above 20%. We do still classify a risk rating to all applicants, most are C rated business where we have an average interest rate of 18% (which was the case with public loans before launching this product). But we also have clients using this product paying from 3%. So we are comfortable that customers are commercially considering an appropriate interest rate for their business.
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KoR_Wraith
Member of DD Central
Posts: 293 
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Post by KoR_Wraith on Oct 19, 2021 10:00:06 GMT
Loaning to a company you manage mitigates fraud risk, but there are plenty of other risks associated to running an SME right now. If you try to apply for an interest-only unsecured loan, I think you will find it difficult to find a provider and if you do, the interest rate is likely to be around or above 20%. Absolutely agree that a 3rd party provider may offer you terms at 20%, no issue with that. My point is that such a 20% rate is reflective of an arms-length transaction, i.e. lender and borrower are independant of each other. If I lend money to my own company, that's more akin to one department of a company lending budget to another department of the same company; as you say, risk of fraud is eliminated, preferrential repayment priority is granted in event of business downturn - hugely beneficial features for the lender. The issue is that this product is most worthwhile when a director loan is charged at the maximum possible rate as to convert taxable profits (corporation tax) into tax free profits. The examples of your website make this perfectly clear. Plenty of financial products deliver on that same principle, but they key difference is that they don't have the same entity on both side of the transaction with a vested interest in setting unrealistic terms given the arms-locked nature of the transaction. Lets be honest, it's a loophole, that in my opinion, if exploited en masse would likely lead to HMRC action.
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Post by danraj on Oct 25, 2021 7:56:47 GMT
That’s why the interest rate must be commercially considered and the main reason must be ‘not for the avoidance of tax’. These conditions exist to deal with those concerns.
If firms want to reduce corp tax, they just incorporate in another jurisdiction and move the profits offshore.
it would be punitive to owner managers to introduce connected-party restrictions, for fear of potential exploitation.
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