Investor Opportunities in the New Lending Market
Companies / Investing 2015 Apr 17, 2015 - 10:29 AM GMTBy: Money_Morning
Shah Gilani writes: The new lending Disruptors are marching – make that rampaging – over the traditional fields and fortifications once commanded by banks.
Today I’m bringing you further proof of the powerful changes these Disruptors are driving, as well as the opportunities they are creating. And I’m also answering some pretty good questions readers posed in response to our recent reports on Lending Disruptors.
(By the way, we’re certainly not done talking about those Lending Disruptors. I’m going to come back on this subject with a few killer stock opportunities for us to play and profit from. But it’s time to move on to the next giant Disruptor that’s going to make us money. And the next Wall Street Insights & Indictments report will impact you, your wallet and even your health, so be sure to stay tuned.)
Today, however, let’s take one last careful look at Lending Disruptors.
It’ll be well worth your while…
A Special Tax Tip
Earlier this week, in American Banker, I came across an article by Nick Clements. He knows the credit card business inside-out, having previously served as the managing director of the consumer credit card business at Barclays PLC (NYSE ADR: BCS). And his sentiments echo exactly what I’ve been telling you about the new Lending Disruptors.
“On the West Coast, a crop of startups without legacy earnings to protect are looking to disrupt an industry that has thus far failed to give consumers the value they deserve,” Clements wrote. “Companies like SoFi, LendingClub and Payoff are offering loans with much lower interest rates than credit cards. In addition to lower rates, these companies are providing customers with a much more transparent product, thanks to the simplicity of a personal loan.”
An attack on the credit-card business is a frontal assault on every big bank’s most lucrative line of business – credit-card lending. Among all the “traditional” lending activities banks engage in, credit cards generate huge, consistent revenue streams, have the fattest profit margins and are major contributors to a bank’s bottom line.
The moat that for so long protected banks’ business lines and profitability is being filled in quickly by the new lenders – and there’s no turning back.
Now here are a couple of great questions that readers wanted answered, which I’m all too happy to do in order to help make it easier for you all to make money
Do the business-development companies (BDCs) you recommend issue a K-1 form to shareholders for tax reporting? I’m interested in the income from these BDCs, but the shareholder must anticipate the lateness of the issue of the K-1 and know to hold off filing taxes until the last minute so the report can be included in the tax filing.
-Jerry
Yes Jerry, BDCs do issue a K-1 for tax-filing purposes. Ideally you would receive this at the end of February or beginning of March. However, some BDCs have been known to issue late these in the tax season, causing you to have to file an extension. Therefore, this should definitely be a consideration when investing in these vehicles.
Thank you for your informative report. I’ve known about BDCs: But are they like “master limited partnerships” (MLPs), where you need to invest a lot of money – like $10,000 in each company – because of tax requirements?
My tax preparer told me to get out of MLPs, because I did not invest large amounts of money, and I was paying through the nose to my tax preparer, because of the extra paperwork that is entailed on the preparer’s end.
That’s one point that is not addressed in any of the newsletters I have read. Investors are encouraged to get into MLPs – because they have to pass their profits on to the investor (90%) in the form of dividends. But when you only invest small amounts, it amounts to pennies you get back. So unless you have $10,000 to invest in them, it’s not worth the effort. Does the same principle apply to BDCs? It is an important factor when making decisions about investing in a trade.
I appreciate all that you do to help us – even the little investors. You are a gem!
-Mary
Really good question, Mary. Because BDC distributions are subject to more complex tax treatment than ordinary dividends, there will be some extra work on the part of your tax preparer. What you receive from the BDC is broken down and taxed as four different kinds of distributions: income, qualified dividends, non-qualified dividends and return of capital. The extra work for your tax preparer may be prohibitively expensive, and you should leverage this cost against any other “extraordinary” kinds of preparation he or she is already doing for you.
Thanks for the comments and questions: As you can see from today’s report, I follow them closely. In fact, I encourage you all to keep them coming. You can post them below.
And be sure to check in next week when we delve into the next big Disruptor opportunity.
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