Digging into the data – Collections & Recoveries

At Funding Circle we are committed to being a transparent business and we want to share more of our information with you around lending and borrowing activity.

As part of this commitment we are launching a series of monthly blog posts looking at the data behind Funding Circle. The series launches today and this first post examines the decline in late payments by businesses and the increase in the amount of money recovered for investors when they experience a bad debt.

Understanding why bad debts occur

Lending to businesses can deliver attractive returns to investors while helping established British businesses to access the finance they need to grow.

However from time-to-time some businesses will be unable to fully repay their loans. This is often due to an unexpected change in their circumstances; sometimes businesses are themselves the recipient of a late payment from one of their customers, causing cash flow problems. At other times another financial provider, like a bank, may withdraw their support suddenly. Often these are only temporary setbacks for a business, but in some cases it can have a more significant impact, leading to a business failing to repay their loan on time.

When businesses are late repaying their loan at Funding Circle our in-house collections and recoveries team work closely with the business affected to deliver the best possible results for everyone. One of our core principles of collections and recovery is ‘survival for revival’. A business that ceases to trade or is declared bankrupt without any recovery for investors is never a positive outcome.

Since we brought all of our collections and recoveries processes in-house in February 2014, we have seen significant improvements in the recovery rate for investors and a reduction in the number of businesses being late with a monthly payment. What this means to investors is that more businesses are paying back on time and when an instance does occur where a business ceases to trade, we are recovering more money for investors.

Let’s take a look at some of the key numbers:

Bringing down late payments

Firstly the number of businesses that are late with their monthly repayments has dropped since February from ~1.5% to less than 1%. The lowest this has reached is 0.80% was on 31 July 2014.

Decline in % of late payments since launch of FC in-house collections and recoveries teamDecrease in late rate - August 2014

Bringing down the rate of late payments was not achieved by simply defaulting more loans. This short term gain may look good initially, but the overall recovery rate would go down with each new default.

Instead, the decline in late payments is a result of building industry leading policies for managing businesses in distress. These policies involve working closely with borrowers as soon as they experience trouble – which helps to reduce the frequency of late payments, and puts us in a better position should the business ultimately cease to trade.

Raising recoveries for investors

As a result of this work, we expect recoveries across all loans defaulted up to 30 June 2014, to recover a minimum of 34p in the pound. Based on more recent loans (between 1 January 2014 – 30 June 2014) we anticipate the recovery rate to be 40p in the pound.

To give some context to these numbers, independent research indicates that traditional lenders would expect to receive between 28p-42p recovery on a secured business loan once a business enters administration, and 1p-3p. on unsecured business loans (without a personal guarantee).

Increase in recovery rate - August 2014

What is particularly encouraging about these figures is that we believe these estimates could potentially be higher. For example we have not included estimated recoveries on bankruptcies, and any loans currently in dispute before the courts or otherwise in negotiation for a payment plan.

What this means for investors

We are committed at Funding Circle to having the best collections and recoveries process in the industry – ensuring investors feel confident in lending to businesses. We know there is still lots more to do and we are constantly looking to recover as much money as possible, and further improve our communications.

We hope you found this post useful. We’ll be talking about this in more detail on our forum – please join us there. Our next data post will appear in September.

The Funding Circle team

David De Koning

Head of Communications


10 thoughts on “Digging into the data – Collections & Recoveries

  1. This all sounds great. However, it bears absolutely no relation to my actual experience of FC’s debt recovery performance on my lending over the last couple of years. Over that time I have experienced something like 6-10 defaults, and FC has managed to recover just 3.5p in the pound of these. Perhaps I’m just very unlucky?

    • I believe there is an element of luck in that. My recoveries are at 34p – bang on FCs prediction. Though it would be higher as I’ve had a couple of defaults recently after quite a good stretch without.

  2. Bringing down late payments : nice graph, FC, but not necessarily due to your bringing recoveries & collections in-house.

    I can think of at least two other quite plausible explanations, one economic, one statistical.

    The economic argument is fairly obvious: there is an economic recovery underway in GB. It is common sense to expect that businesses will be less stressed, which will translate into fewer late payments.

    The statistical argument is slightly less obvious, but still quite straightforward. The FC loan portfolio is increasing (quite rapidly). This increase basically take the form of new, ‘young’, loans. Therefore the proportion of the loan book which is ‘young’ (less than, say 6 months old) is increasing. FCs own published graphs show that loans under 5/6 months old are relatively unlikely to experience difficulties (and that is just common sense – the circumstances of a business have had little time to degenerate since originally assessed). So an expanding loan book implies a younger loanbook, implies fewer lates and defaults. QED

  3. In my experience, are the level of loan rating FC give any good. Also are the Guarantees worth anything at ALL, I fear they are worthless.

  4. The recoveries on my wife’s account currently amount to 9.9% of bad debt.
    We are lending to 147 businesses, and are well diversified with a maximum exposure of 4.1% to any one business (most loans amount for 1%, and none of my “larger” holdings has defaulted). My return after fees and bad debts is 4.8%, and has been dropping significantly in the past month. Typically one or two loans are defaulting each week in the past month, which caused my return to drop from 9% a month ago to 4.1% today. I handpicked every single loan. I have stopped any further investment till I see whether this just bad luck, or a persistent negative trend.

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