Digging into the data: How investor returns change over time

Whether you are new to investing, or have many years’ experience under your belt, a well-diversified Funding Circle portfolio can provide you with attractive and stable returns while helping the UK economy to grow.

To help guide you on what you can expect from your lending experience, we wanted to show how a typical investor account could perform over a five-year period.

What data did we use?

We used five full years of historical loan performance data to simulate how the returns in a typical investor’s portfolio can change over time. In our example, an investor lent £10,000 across all the loans originated through Funding Circle in 2012. Each month, the loan repayments and interest received were lent to new borrowers.

Performance over time

The below chart shows the annualised return, after fees and bad debt but before tax, earned by the example investor over a five year investment period. Past performance is not a guarantee of future returns, however you can see that there are typically three distinct phases involved when lending to businesses.

Phase one – initial returns are at their highest

For the first few months the investor’s annualised return is at its highest, at approximately 7.8% after the 1% annual servicing fee is deducted. This is because the investor has typically yet to experience any borrowers being unable to repay their loans.

Phase two – the impact of bad debt

We robustly assess every business you lend to, however from time-to-time some borrowers will be unable to repay their loans because something significant changes in their business. This is called bad debt. Bad debts generally start to occur approximately six months after the loans are made. This is reflected in the chart above, where our example investor’s return starts to dip after six months. This trend then naturally decreases over time as the rate at which businesses run into difficulties tends to decrease.

While it can be concerning to see bad debt on your account, it’s important to see this as a normal and expected part of lending to businesses. Bad debt is usually more concentrated within this phase of a loan’s life, so returns are unlikely to decrease for good. Learn more about bad debt and loan defaults here.

Phase three – returns stabilise as recoveries arrive

After 18 months the example investor’s return stabilises, then generally increases as recovery payments start to arrive. As of 30th June 2018, approximately 49% of the value of loans defaulted for at least 3 years has been recovered. This trend typically continues for the rest of the investment period, with the example investor ending the five year investment period having earned an annualised return of 6.5% after fees and bad debt.

It’s important to note that past performance is not a guide to future performance, and as you are lending to your own individual portfolio your actual returns may differ. However the above chart provides an indication of how groups of small business loans can perform over time.

Diversification can help you earn a stable return

Over the five year investment period, our example investor earned a stable annualised return of 6.5% after fees and bad debt. This was helped by being especially well-diversified (lending to all loans made in 2012). Diversifying by lending small amounts to many different businesses, can also help you earn a stable return.

Our automatic lending tool will help you quickly build a diversified portfolio. To spread your funds across at least 100 businesses, we suggest lending £2,000 or more, as this allows you to:

  • Lend to at least 200 businesses
  • Lend no more than 0.5% of your total to each one

93% of investors who have followed these two steps for at least a year are earning 4% per year or more, after fees and bad debt. If you’d like to start with less, the minimum initial transfer is £1,000. Correct as of 30th September 2018.

Growing your portfolio

Each month you will receive either a monthly principal and interest (the amount you lent plus the interest earned) payment, or an interest-only payment from the businesses you lend to. The below chart shows three different scenarios which highlight the positive impact reinvesting these principal and interest repayments can have on your portfolio.

If our example investor had lent £10,000 across all loans made in 2012, but did nothing with their capital and interest repayments, they would have ended the five year investment period with £11,131. However, if they compounded their earnings by reinvesting those repayments on new loans made, this amount would increase to £13,215.

Making a regular contribution each month can also have a considerable effect on the growth of your portfolio. Alongside reinvestment of all principal and interest repayments, if our example investor had also set up a standing order of £100 each month from January 2013 (once the initial £10,000 had been lent by the end of 2012) then by the end of the investment period their account balance would stand at a healthy £18,672.

The power of compound interest

Naturally, putting money aside each month means you’ll have more in your account. However, regular payments will also help you earn more interest. The more money there is in your account, the more interest it will gather, and the more compound interest you’ll earn on top of that.  

If you started with £10,000, here’s an example of what you could earn on the Balanced lending option with regular monthly payments:

Compound interest table

“Someone’s sitting in the shade today because someone planted a tree a long time ago” – Warren Buffett

Building a six-figure portfolio may seem like a daunting goal, but by taking a long-term approach and adding a modest amount each month, you could look forward to a substantial sum in the future. You can see how your own portfolio could grow over time with this compound interest calculator.

It’s important to remember that as this is an estimate, actual returns may be higher or lower. By lending to businesses your capital is at risk and funds are not covered by the Financial Services Compensation Scheme


Our aim at Funding Circle is for investors to earn attractive, stable returns by lending directly to small businesses. Although some bad debt is a normal and expected part of the lending experience, we hope this piece has demonstrated that keeping your account well-diversified and making regular contributions can help your portfolio grow at a stable rate over the long-term. More information on investor returns, including loan performance by year, can be found on our statistics page.

Enjoy lending,

The Funding Circle team

*These figures are estimates based on lending an initial £10,000 through the Balanced lending option, earning a return of 6% per year. They were calculated using a compound interest calculator. The projected return for the Balanced lending option is 6-7% per year after fees and bad debt, but before tax. Your actual return may be higher or lower. Please note, forecasts are not a reliable indicator of future performance and your capital is at risk.

Jack Pritchett

Senior Communications Manager


6 thoughts on “Digging into the data: How investor returns change over time

  1. Interesting that annualised return isn’t greatly different for 800 loans compared to 200. I guess the main benefit above 200 comes from smaller overall volatility, the other side of the coin so to speak. Plus the ability to build in a small proportion of lower rated/higher potential return?
    Starting to hit early phase 3 with my earliest loans, reassuring & very insightful article as always.

  2. 60x £100 is £6000. And the interest would also be significant. Yet the 5 year projections, have less than that difference between the two reinvestment projections, with and without £100 additions.

    • Hi there, the example investor set up their standing order in January 2013, so there are 48x £100 contributions rather than 60. Thanks.

      • Ah, I see. I’m used to my science studies, where graphs need to stand alone, as well as be contextualised in the text. Cheers.

  3. Nice analysis. I’m just coming out of Phase 2 – but didn’t realise it was a finite phase. Seeing regular defalts has been a bumpy and distressing ride, so it’s comforting to discover it’s “only” a pahse, and that the projected recovery rate is 44%

  4. So you are telling me, that if I will be regularly sending money to my investment account I will have more money there in the end. Impressive.

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