Soon you’ll be able to earn tax-free returns at Funding Circle, thanks to the launch of the new Innovative Finance ISA. Currently you are able to split your annual allowance of £15,240 between a cash ISA and a stocks and shares ISA, and new for the 2016 tax year, you’ll also be able to open an Innovative Finance ISA (IFISA).
We’ll be confirming more details on how you can open your Funding Circle ISA over the coming weeks, but ahead of the launch, we wanted to share 6 key reasons why we believe Funding Circle is the best platform for your new Innovative Finance ISA. For the latest ISA news from Funding Circle, click here.
1. You can earn an estimated annual return of 7.1% lending to British businesses
ISAs enable you to make tax-free returns on your money, but with only one Innovative Finance ISA available to subscribe to every year, it’s important to maximise the tax benefits of any investments you hold.
The current estimated return at Funding Circle is 7.1%* which is the highest estimated return across all of the major platforms, enabling you to maximise your tax-efficiency and save the most tax.
If a higher rate taxpayer lent £10,000 through Funding Circle with an average return of 7.1% after fees and bad debts, their earnings, after deduction of income tax at 40%, would be approximately £426 after one year. By taking advantage of the new Funding Circle ISA, those earnings would increase to £710.
Since launching in 2010, investors have collectively earned more than £72.5 million in interest, after all fees and bad debts have been deducted. Data correct as of 8 March 2016.
2. Your lending helps British businesses grow
By lending directly to UK businesses through Funding Circle, you can earn attractive returns whilst also having a real impact on the growth of the UK economy. To date, Funding Circle investors have helped more than 15,000 businesses access finance.
Independent research by think-tank Nesta found that an average business borrowing through Funding Circle employs approximately 10 people, and increases headcount by 30% within 12 months of successfully accessing finance.
3. You can diversify your funds across thousands of borrowers
More than 15,000 businesses have taken out loans over the last 5 years, which means there are more lending opportunities for investors at Funding Circle than any other small business lending marketplace in the UK.
By lending as little as £20 to each business, you can spread your money across thousands of borrowers. Not only does this help more businesses to grow, but your investment will also be diversified, helping you to earn a more stable return by managing risk effectively.
To be diversified, we encourage:
1. Lending to at least 100 businesses; 2. Lending no more than 1% of your total investment to each business.
As of January 1st 2016, every investor who has followed these 2 simple steps has earned a positive return, and approximately 92% have achieved a return of at least 5% after fees and bad debt^. Past returns are not necessarily a guide to future returns as by lending to businesses, your capital is at risk.
4. You have options to access your money early
There may be times when you want to access your money before the end of a loan term, and the marketplace provides a way for you to do this. You can access money early by selling loan parts to other investors for a 0.25% fee. More than £175 million of loan parts have been traded so far.
It’s worth noting that your ability to sell loan parts is not guaranteed, and largely relies on demand from other investors to buy them. You can also withdraw your monthly repayments whenever you wish.
5. Our robust credit models have been stress-tested by a leading consultancy
Alongside our strong track-record and experienced team of in-house risk experts, we publish all information regarding bad debts on our statistics page so you can see how loans perform against expectations. The current bad debt rate is 1.5%, compared to the annual estimate of 1.7%.
We also commissioned independent stress testing of our loanbook (all Funding Circle loans) to estimate how loans would perform in the case of an extreme economic downturn. A leading consultancy, who stress test banks, built a stress testing model for us and applied their model to our loans. The results were positive, estimating a fall in the overall annualised return investors would earn, after fees and bad debt, to 5.6%.
It is important to note however that past performance is not necessarily a guide to future performance, and the nature of modeling for future economic events is that it is an estimate.
6. A commitment to transparency
We believe transparency is a crucial part of lending so we publish the full historical performance of all loans on our statistics page. This includes details on the total amount lent and repaid, average interest paid across all loans, and details of any bad debts. Additionally, we think it’s important investors can see exactly who they’re lending to. You can see details about every borrower including financial performance and sector, and you have the opportunity to ask businesses questions before lending to them.
We hope you found this post useful. We’ll be publishing more information over the coming weeks about ISAs, including how Funding Circle returns compare with other investments; as well as updating you on when and how you can open your Funding Circle ISA account.
If you have any immediate questions, please feel free to leave comments below or join us on our forum where we’ll be discussing ISAs in more detail.
The Funding Circle team
*The current estimated return is an estimate of the annual return after fees and bad debts that investors could earn from lending money to businesses seeking loans today (8th March 2016). It is calculated by taking the gross interest rate less fees and estimated bad debts that will occur in the future for each of the last 100 loans accepted on the marketplace. The average return is compounded and is updated daily.
^This is based on the 21,086 investors who have been lending for at least 1 year and have been at the stated level of diversification for at least 75% of the days they have been lending (44.3% of all active investors).This data is based off actual returns for people lending for at least 1 year and does not include future expected losses. Remember, past returns are not necessarily a guide to future returns.