Happy New Year!
2018 has arrived, bringing with it a chance to reflect on the past year and set some goals for the months ahead. Your finances, including your Funding Circle account, should be no exception. Here are some of our key tips to help you get the most from your lending experience in 2018.
Set yourself up to earn a more stable return
Data at Funding Circle shows that investors who diversify by lending small amounts to many businesses are more likely to earn a stable return. To help illustrate this, the below chart shows the minimum annualised return earned by 95% of investors lending for at least a year, by the number of businesses they have lent to.
The chart shows that 95% of investors who have lent to at least 100 businesses equally for a year or more have earned at least 4% per year after fees and bad debt. In fact, since 2010 every single investor who has followed this level of diversification has earned a positive return. (Data correct as of 1st October 2017).
Becoming diversified has never been easier, as our lending tool automatically lends no more than 0.5% of your portfolio (subject to a minimum of £20) to each business. We suggest building a portfolio of at least £2,000 to help you lend to at least 100 businesses.
Check your Lending Settings are right for you
When lending through Funding Circle you can choose from one of our two lending options, Balanced or Conservative. Both options will allow you to quickly and easily build a portfolio of creditworthy businesses depending on your personal preference:
- Balanced – lend to the full range of creditworthy businesses, aiming to achieve an attractive, stable return.
- Conservative – focus on businesses that have been assessed as lower risk, but with a lower projected return.
It’s important that the lending option you have chosen is right for you. You can review and change your chosen option in the Lending Settings page when logged in to your account. This is also where we will display the current projected return for each option.
Boost your earning power with the Funding Circle ISA
We’re currently in the process of rolling-out the Funding Circle ISA to all current investors. The ISA works just like your Classic Funding Circle account, but the interest you earn is tax-free. This could provide you with a significant boost to your earning power. For example, if a higher rate taxpayer lends £20,000 through the Funding Circle ISA and earns a one-year return of 7.2%* after fees and bad debt, their post-tax earnings after one year could increase from £864 to £1,440.
We’ll send you an email when your account is ready to open, so please regularly check your inbox. You can also login to your account to see if your ISA is available. Tax rules and relief can change depending on your personal circumstances, and you can find out more about the features and risks of lending through a Funding Circle ISA here.
Recognise bad debt as a normal part of lending
When lending to businesses there will always be some who are unable to repay their loan. We call this bad debt, and we account for it when calculating projected returns. Bad debt is rarely spread out evenly over the course of the loan term, and tends to happen during certain periods of a loan’s lifetime. You can see this from the chart below, which shows the annualised return, after fees and bad debt, earned by an example investor over a five year investment period:
In our example, based on five years of loan performance data, 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.
You can see that in this example most bad debt occurred during the period marked as phase 2, but then reduced as loans continued to mature and recoveries arrived. You can read more about how returns can change over time in our blog, but the important thing to remember is that a decrease in your return due to bad debt is an expected part of the lending experience, and will typically stabilise as your loans mature. Remember past performance is not a guarantee of future returns.
A modest regular contribution and a patient approach can have extraordinary results. For example, if you start with £10,000 in your Funding Circle account and set up a standing order for £100 a month, after 30 years you could have an account worth over £200,000**. Find out more about setting up a standing order, or see how your own portfolio could grow over time with this compound interest calculator.
It’s important to remember that as you lend to your own individual portfolio of loans your return may be higher or lower, and by lending to businesses your capital is at risk. Tax rules and relief can change depending on your personal circumstances.
We hope these tips help you get the most out of lending to businesses through Funding Circle. If you have any questions about your account, please get in touch.
The Funding Circle team
*The projected return is an estimate of what investors could earn on the Balanced lending option (as of 10th January 2017), after fees and bad debts, but before tax. It uses the loans we expect to be funded on the platform, and the estimated bad debt rate of those loans based on our all-time loan data. See the full calculation here.
**Returns are based on the annual projected return of 7.2% for investors lending through the Balanced lending option (as of 10th January 2017). Returns are compounded monthly and are after fees and bad debt but before tax. Based on this, an account worth £10,000 with a standing order of £100 a month would be worth £213,837.61. Returns are calculated using a compound interest calculator.