At Funding Circle our aim is for you to earn stable returns by lending directly to businesses. As with any type of lending, some businesses may run into difficulties after taking their loan and be unable to repay it in full. We call this bad debt. We expect a certain percentage of bad debt to occur each year and account for it in your projected return.
When a business falls behind with their repayments, our Servicing, Collections and Recoveries team will work closely with them to achieve the best possible outcome for investors. To help you understand the steps in more detail, we’ve set out below a guide to how our collections process works.
A repayment becomes late
When a business falls behind in payments we try to contact them straight away. Many are responsive and cooperative (more on this below). However, if we cannot reach them, we have a phased approach to resolve the issue:
Try to retake the direct debit
We typically find out if a direct debit has failed 3 days before the payment date. At this point we automatically send an email to the borrower, and we try to retake the direct debit. We will also phone the borrower to understand why the direct debit failed and to ensure that the relevant account has the required funds.
Send a demand letter
If the second direct debit fails, we phone and email at least twice before issuing a formal demand letter for the payment. After issuing the letter we will continue to phone and email the borrower (and any guarantors).
Charge a late fee
After seven days we will apply an administration fee to their arrears and send another demand letter to both the borrower and the loan guarantors. The letters include documents explaining some of the possible consequences of insolvency.
The purpose of the administration fee is to encourage borrowers to get the loan back up to date, and not to prioritise other creditors over their debt to Funding Circle investors. The fee, if received, goes towards any third party costs that arise from dealing with their case (i.e. tracing agents, court fees, external lawyers, etc).
We continue to contact the borrower and guarantor by phone and email. We also use online tracking technology and other data sources to try to trace the borrower, and may arrange a site visit by a field agent.
Default the loan
Depending on the circumstances, if we have had no contact from the borrower or the guarantors we may then decide to default the loan. We will typically default a loan when it has been late for three months, although we may default at any time if we believe it is in the best interests of investors. When the loan is defaulted we demand full payment of the full outstanding amount from the borrower and the guarantors.
This also has the effect of crystallising the debt of the guarantors, and enables us to commence formal legal or insolvency action.
Most of our recoveries come through the loan guarantors, usually in one of four ways:
1. Payment plans
We will always seek to agree a fair and affordable payment plan with borrowers and guarantors. We want guarantors to get back on their feet and repay the loan in full over time, and usually we will not agree to an early settlement figure for less than 100% of the principal and owed interest. We always ask for contractual interest to be paid too. If the payments are below a certain threshold, we will require security on the guarantor’s property.
We review payment plans (and the guarantors’ financial position) periodically throughout each year, to ensure that the level of payment plan is fair to both the borrower and to investors. Although repayments may be small to start with, given time payment plans do increase and form a significant part of the recoveries for investors.
2. Individual voluntary arrangements
We do not accept informal settlements, but we will review (and often accept) a guarantor’s proposals for an Individual Voluntary Arrangement (IVA). This may involve some write-down of the debt. Having an IVA in place (rather than an informal arrangement) ensures that an insolvency practitioner, who is an officer of the court, stands behind the agreement and is responsible for making sure the proposal is fair and accurate. An IVA is designed to give people another chance, and we respect the legal purpose behind this procedure.
Sometimes bankruptcy is the right option for an individual. When a guarantor is made bankrupt, we will always try to get an insolvency practitioner from our panel appointed as Trustee in Bankruptcy (i.e. the person who takes controls of the bankrupt’s assets and carries out various investigations). However, sometimes this is not possible. When an individual enters bankruptcy it is very rare that there will be a material recovery for investors.
4. Court Action
Sometimes court action will result in us appointing High Court Enforcement Officers (i.e. bailiffs) to agree a payment plan with a guarantor, or we seek to obtain a charge on their property and then an Order for Sale. This is very much the last resort for us.
We will normally stop any legal action if the guarantor starts communicating with us again. That said, if we have any reason to believe that a guarantor is deliberately trying to deceive us (rather than simply being afraid to face up to his or her responsibilities), we will always take legal action or commence bankruptcy proceedings rather than try to negotiate or approve an IVA.
Support for credible borrowers
As mentioned above, many borrowers who experience difficulties do communicate with us and want to repay their loan once they get back on track. Where possible we try to find a solution that will allow them to keep going. If they can turn their business around, sell assets or start a new business, not only does it help them, but we can recover far more for investors over the long term.
The borrower is always encouraged to pay all arrears as quickly as possible. However, if they are credible, then by not pushing for an immediate (and unlikely) payment in full we can create trust and loyalty. By supporting businesses through difficult periods, we aim for full repayment of the principal with all accrued interest for investors.
We have developed this strategy over many years and it has produced strong results. We will continue to refine and improve our process, and work tirelessly to chase every late payment and defaulted loan to get the best outcome for investors.
If you’d like to learn more about bad debt, defaults and how they can impact your return, more information can found in the following articles:
The Funding Circle team