Digging into the data: how long does it take to receive recoveries?

Lending to businesses can deliver attractive returns to investors, while helping those businesses access the finance they need to grow. However, from time-to-time some businesses will be unable to repay their loans, which is why diversification is important. When this happens, the time it takes for recoveries to start reaching your account can vary but on average will take around 6 months.

What happens when a business falls behind with their repayments?

When it appears that a business is likely to miss a scheduled monthly repayment, we immediately contact them to understand their financial position and to see if we can help the business get back on track. We keep you updated on the borrower’s status by writing loan comments which are visible in your online account.

If you have any defaulted loans you may have noticed that we apply a RAG (Red, Amber, Green) rating system to help you assess the likelihood of recovery, and we update this RAG rating as we receive new information. Since we brought all of our collections and recoveries processes in-house in February 2014, we have made significant improvements in the number of loans late on their monthly repayments, and the recovery rate for investors.

In this blog we’ve set out some recent analysis in respect of the estimated recoveries and the period of time it takes to repay that money to you. These estimates:

  • are accurate as of 1 November 2015;  
  • are based on 3 months’ cash-flow on defaulted loans for the period August – October 2015, and extrapolated out for a maximum payment plan of 5 years;
  • do not include any interest payable (which we also seek to recover); and
  • give a 0p/£ recovery estimate to any defaulted loans that are in negotiation or in a court action (i.e. where there is no cash-flow). The estimates are on the conservative side, although we are currently collecting data so that all defaulted loans can have an estimated recovery rate at every stage post-default.

How long after a business defaults do I have to wait until I start seeing some recovery?

When a loan is defaulted, the business has usually failed. This is why most of the recoveries we see come through guarantors starting new businesses, realising assets or entering employment and providing us with a fair and affordable payment plan. Sometimes the guarantors will enter a formal insolvency procedure as a result of our enforcement action, action from another creditor or by themselves voluntarily. Unfortunately these options rarely give an immediate material recovery.  

Why is there a difference between actual and estimated recovery rates?

As you can see from the H1 2015 bars, it usually takes around 6 months before we have sufficient cash-flow to estimate a recovery over 5 years of just under 40p/£, and just over a year until the actual recoveries have reached 30p/£. We are still negotiating many of the defaults in 2015 H1, and we expect both the purple and blue bars in the graph below to increase.

Estimated and actual recovery rates by default date cohort

The estimated and actual recovery rate by when the loan was accepted

If we now look at recoveries on defaults by when the loans were accepted, we see that material recoveries of approximately 30p/£ can be expected within 3 years of the accepted date for those defaults, but for the same group the estimate over 5 years is nearer 40p/£. The reason for this is that there are less “new” defaults in older group of loans. New defaults dilute both the actual recovery rate and the estimated recovery rate, but have more impact on the actual recovery rate as there has been less time to build up recoveries.  

Recovery rates by origination cohort

As an aside, in February 2014 we received recovery on only 40% of all defaults.This figure has steadily climbed and reached a peak of 62-63% in April 2015, and has maintained this level since.

Where loans have defaulted, and we have made a recovery, approximately 80% are in payment plans (rather than insolvency procedures). On this basis we believe that defaulted loans that are originated in 2015 will ultimately recover nearer 45-50p/£.

How does the rate of material recovery change over time?

 

Proportion of defaulted loans for which a partial or whole recovery has been made
Conclusion

At Funding Circle we are committed to having the best collections and recoveries process in the industry. We are constantly looking to innovate and use technology to recover as much money as possible for investors, and further improve our communications with you. We always appreciate your feedback, so please feel free to send this to contactus@fundingcircle.com.

Antonia Lock

Marketing Executive

 
  • James Wigmore

    Why is it that so often the Guarantors fail to pick up the tab? Surely this is a flaw in FC’s vetting procedures for guarantors?

    • fundingcircle

      Hi James. We take personal guarantees from directors and shareholders so we can pursue them if borrowers are unable to make their monthly repayments. However, the financial position of a guarantor will change over time. As a business deteriorates guarantors often put their own assets in to support the business, and so when the business fails a guarantor may have liabilities to a wider number of creditors than when the loan was originated.

  • David Dawtry

    There is little point in saying a loan is backed by a guarantor, if all that person has to do is refuse to pay up. A guarantor must be in a position to cover the loan repayments if things go wrong, and have assets on the line to prove so. If not, and it’s only a vague promise then they are NOT a guarantor

    • fundingcircle

      Hi David. Thanks for your comment. Please see above for additional information on personal guarantees. If a guarantor refuses to make any payments then we will either take the guarantor to court or petition for the bankruptcy of the guarantor. A court process may result in us obtaining a charge over the guarantor’s property or appointing High Court Enforcement Officers to visit the guarantor and seize assets. If we have a charge over the property we may proceed to get an Order for Sale from the court. If a guarantor is made bankrupt, then we usually seek to appoint a trustee in bankruptcy from our insolvency panel. The trustee takes control of the guarantor’s asset and may sell them to distribute realisations to creditors. However, as mentioned above, most recoveries come through guarantors starting new businesses, realising assets or entering employment and so when a business defaults on their loan we aim to work with them to determine a fair and affordable payment plan for both investors and businesses.

  • Alex Thornton

    Why is the actual rate of recoveries for 2015 H2 so abysmally poor?