Meet the Credit Assessment team

At Funding Circle we want to help you earn attractive, stable returns by lending to small businesses across the UK. Of course, one of the key aspects of achieving this is having a robust methodology to carefully assess the businesses you’ll be lending too. To give you a bit more insight into how this process works, we caught up with Henry, Fay and Edward in the Credit Assessment team to ask about their role at Funding Circle.

First, can you tell us where your team sits in the overall funding process?

 

Henry – When a business applies for a loan online, there are several checks that happen automatically. For example we pull information from Companies House to check how old the business is, and we’ll run credit checks with credit bureaus like Experian. Some businesses will not meet our criteria straightaway, the rest will pass onto a full assessment.

To assess an application, our Loan Analyst team will collect all the information we need. This includes their full credit report, business bank account data, details on the business shareholders and financial accounts with profit and loss information. They’ll then use our bespoke internal risk models to give a risk grade to each business.

They then pass that information on to us. We look at their application, their credit score, other external data sources and all the other information available to us. We then use our internal credit criteria to decide whether we can make them an offer.

When it comes to making a decision, what do you factor in?

 

Edward – There are hundreds of data points that go into every assessment. Naturally key factors include the financial health of the business, their debt history, and how much they can afford to pay back each month. 

It’s also important that they are asking for money for the right reasons. We support a wide variety of loan purposes, but there are some that we don’t support. 

Fay – It’s not always about approve or decline, we take a holistic view of the business. We look at the potential risks. We want to give a quick decision to business owners, but not at the expense of carrying out a serious assessment. All cases get looked at with due diligence, if it’s more complex and takes more time, that’s what we’ll do. 

You mentioned that you use internal models, how are these created?

 

Fay – Our Risk team uses huge amounts of data and cutting-edge techniques to develop our assessment models. They are constantly updating them too, feeding in more data, adapting to wider economic conditions and so on.

We sit right in the middle of investors and the businesses they lend to. We want to help investors get the best returns possible, and, if they meet our criteria, help small businesses get finance at a price that’s fair to them. Our risk models help strike that balance. 

Henry – The way I see it, the Risk team are like the FA and we’re the referees – they set out the rules, we apply them. 

How much experience does the team have?

 

Fay – Across the assessment teams we have decades of experience from a wide variety of financial institutions. For example I was previously at another fintech company and before that was in asset finance for 5 years. 

Henry – I joined Funding Circle 5 years ago and have worked my way up in the Credit Assessment team.

Edward – I’ve previously worked at Deloitte in corporate tax and at a payments company. We all chip in and help each other too, especially with the more complex cases. There’s tonnes of experience in the team we can all draw on. 

 

 

Do you have any other responsibilities?

 

Fay – Obviously our main role is assessing loan applications, but we also run or support other projects to help us improve or adapt to external changes. I worked on a project 

regarding the legislation around Company House, how it was changing and how that would impact our process. 

Edward – I look at how the team operates, what are our strengths and where we can improve. 

Henry – I attend meetings with our brokers. We have long-standing relationships with many of them, and I join to answer any questions so they can refer the right businesses to us.  

What’s the culture like on the team?

 

Henry – We have a really open working environment, no one is tucked away in an office. If we have questions or need help, we have many people from different backgrounds, different experience levels and different areas of expertise, and there’s an attitude where everyone knows they can get advice when they need it.

Edward – There’s openness and respect too. A new joiner is happy to go and ask someone with 20 years experience because they want you to learn. 

Fay – We’ve got a really well mixed team. There’s people who have been through the Funding Circle journey and have worked their way up, and there’s people that have joined from different backgrounds. We’re not afraid to share our different perspectives. 

Edward – Breakfast is important too – we all go for toast together in the morning. 

Fay –  I get in trouble sometimes because I go earlier…

How does it feel to work for a company that’s helping businesses and investors? 

 

Edward: It’s really cool. I saw a shop the other day and I thought ‘Aha, I know that business!’ because they had been a customer of ours. You can see the difference you’re making. When working at some other businesses, customers are just treated like numbers on a system.

Fay: With Funding Circle we’re having a wider impact for small businesses and we’re filling that gap in the market for investments. It’s really rewarding. 

That’s amazing, thank you for taking the time to speak to us!

 

World Photography Day

World Photography Day is an annual, worldwide celebration of the art, craft, science and history of photography. We all love a good photo, whether we’re looking at it in a gallery or whether we’re scrolling past it on Instagram; the art of photography is one to be honoured. We’ve chosen to honour photography by putting together a list of our favourite photos from members of the Funding Circle team and photos of businesses we’ve worked with.

Funding Circle’s very own Inti Libermanares, describes himself as a photographer and says what he loves most about photography is the possibility to capture a moment in an artistic and creative way. He loves being able to convey feelings out of spontaneous situations and his work above does just that.

 

Taken while travelling before he joined Funding Circle, wordsmith Robert McCorquodale says the photo pictures a single flamingo on the edge of a volcanic lake, near to the salt flats in Bolivia. This almost looks like a painting if you don’t look too closely!

 

Our resident design master, Alex Santos, makes it very clear that this is not from Game of Thrones and that it’s a hidden beach with mighty difficult access called ‘Praia da Ursa’, or the Bear beach, in Portugal near Cape Roca. Kings Landing or not, we think this photo is stunning.

 

Family owned business Perky Blenders, is in the art of speciality coffee, with five locations across the east side of London, these guys are sharing the coffee love with as many people as possible. These photos were taken when we took a trip down to one of their shops and were lucky enough to watch them do their magic.

 

Located in Redcar, on the Yorkshire coast, Yorkshire Gelato Company pride themselves in taking desserts to the next level and creating beautiful works of art to finish any meal using the finest ingredients. As you can see form the photo above, they really love their desserts!

 

The Great Yorkshire Shop hand picks fine goods exclusively from local independent makers, artists and designers. Based in Leeds, their store is bursting with amazing creative gift items and you can feel that the owner really loves what he does. The photos above were taken during our previous visit and we loved it there.

Share your favourite pieces of photography with us on social media at @FundingCircleUK

Chief Risk Officer’s update – August 2019

Jerome Le Luel joined Funding Circle as Global Chief Risk Officer four years ago; bringing with him more than 20 years of experience in risk management. His previous roles include Global Head of Risk Analytics at Barclays Bank and Global Chief Risk Officer at Barclaycard, where he successfully navigated their global portfolio through the 2008/9 recession.

Jerome leads a team of more than 100 risk professionals across the four markets Funding Circle operates in: including data scientists, credit risk analysts and credit assessment experts.

In the second of our series, Jerome will provide his view on the current macroeconomic climate in each of our markets, what this means for the businesses you lend to, and the actions we have taken to protect your interests.

Fair economic conditions, with some increasing uncertainty

In my last update, I discussed how the economies of the four countries where investors lend through Funding Circle have recovered since the last recession. Across the UK, US, Germany and the Netherlands, these conditions have largely remained in place.

However, over the past six months we have started to see some increasing signs of uncertainty. In the US, interest rate rises—and subsequent cuts—point to an indecisive approach from US central bankers. In the UK, there is increasing political and economic uncertainty around the possible consequences of Brexit. At the same time, rising trade and political tensions have heightened anxieties in export-oriented economies like Germany and the Netherlands, who sell more goods than they buy. Despite this, these economies are performing well, with unemployment and central bank interest rates still at historically low levels.

Maintaining attractive returns with a prudent approach

We update our projected returns every three months. For each group of loans, we combine the actual annualised return received to date, and our latest estimates for the remaining term of the loans that have not yet been repaid. Our most recent update shows returns remaining stable since our Q1 update.

Projected returns* after fees and bad debt, all markets

Source: Funding Circle

At Funding Circle, our team carefully monitor the macroeconomic environment and regularly update and adjust our credit models to reflect changing conditions, tightening when necessary. Over the past twelve months we have prudently adjusted our lending criteria to strengthen the resilience of the loanbook, which is well-positioned for any potential changes to the wider economy.

Projected returns after fees and bad debt, Q1-Q2 2019 loans

Source: Funding Circle

The above chart shows the loss coverage**—the amount bad debt would need to increase by before investors experience negative returns—of the loans being taken out in each of our markets this year. As an example, if businesses experienced conditions similar to those in 2008, our stress-testing shows investors could still expect to earn positive returns. 

This approach should allow us to continue delivering attractive returns to investors across all our markets.

UK

Brexit uncertainties notwithstanding, overall UK small business performance has remained stable. However, there is a small segment of the market which has been underperforming. I have previously discussed how a significant expansion in consumer borrowing since 2013 has led to an increase in the number of individuals being made insolvent. While you don’t lend to individuals through Funding Circle, this trend has had some knock-on effect on the insolvency rate of UK small businesses; the smallest of whom may be more reliant on lines of personal credit when managing their business cashflow.

UK small business and consumer insolvencies (Q1 2008 = 100)

Source: Gov.uk

The large majority of businesses you lend to are performing in line with expectations, however the worsening consumer credit environment has impacted a small population of loans in our higher risk bands. Our 2016 – 2018 cohorts were updated in April to reflect this. 

Projected returns after fees and bad debt, UK

Source: Funding Circle (as of 30th June, 2019)

Last year we made a number of adjustments to our credit policies and risk models to significantly reduce investors’ exposure to this segment of businesses. While we have already seen some positive results, earlier this year we further tightened our lending criteria. We have also increased some of the interest rates paid by businesses. This will help protect returns during a period of increasing uncertainty and loans originated in 2019 are now expected to deliver net returns of 5% – 7%.

US

In the US, the economy has been performing well, with both small business and consumer insolvencies remaining significantly below pre-recession levels.

US small business and consumer insolvencies (Q1 2008=100)

Source: Paynet, Federal Reserve

While currently very healthy, we are mindful that the current business cycle has lasted for a record ten years. The ongoing trade issues with China could affect this, while the Federal Reserve has also started to cut interest rates. We have also started to see some wider business volatility, which has fed-through to the projected returns for loans taken out in recent years. 

Projected returns after fees and bad debt, US

 Source: Funding Circle (as of 30th June, 2019)

In light of this, we have strengthened the US loanbook ahead of any changes to the business cycle, by tightening our lending criteria and increasing the interest rates paid by businesses.

DE/NL

Both the German and Dutch economies continue to perform strongly, with the insolvency rate across both individuals and businesses continuing to fall.

DE/NL small business and consumer insolvencies (Q1 2008 = 100)

Source: DESTATIS, CBS

Rising global trade tensions have led to a slight reduction in business confidence, although levels remain well above those seen during the last recession.

DE small business and consumer confidence index

Source: OECD

As a result, loan performance across both Germany and the Netherlands has remained strong, although we will continue to carefully monitor both markets for any sign of stress.

Projected returns after fees and bad debt, DE


Source: Funding Circle (as of 30th June 2019)

Projected returns after fees and bad debt, NL

Source: Funding Circle (as of 30th June 2019)

Making the right adjustments

As Chief Risk Officer, my role is to help you earn attractive returns throughout each stage of the economic cycle. Although we have seen some macro volatility in our markets, we believe we have made the right adjustments to maintain the resilience of the businesses you lend to.

The four markets we operate in are great places to lend to small businesses. Careful monitoring, intelligent use of data and prudent action should allow us to continue providing you with attractive returns. 

We hope you have found this information useful. If you have any questions, please don’t hesitate to get in touch, and remember by lending to businesses your capital is at risk. Not covered by the Financial Services Compensation Scheme.

Jerome Le Luel

*Projected returns as of 30th June 2019. The projected annualised return shows the return, after fees and bad debt, that loans are currently estimated to achieve. Loans are shown by the year they were taken out. The return is calculated by combining the actual annualised return received to date, and our latest return estimates, including expected recoveries, for the remaining term of loans that have not yet been fully repaid. Past performance is not a guarantee of future returns and by lending to businesses your capital is at risk.

**The loss coverage of any given group of loans is the gross yield—minus the 1% annual servicing fee—divided by the projected bad debt rate of those loans. It is a simple representation of how much bad debt would need to increase by before it is higher than the interest investors receive from those loans. As bad debt does not occur evenly over a loan’s term, the loss coverage assumes loans are held until they have been fully repaid and recoveries have been received. There are other factors that affect how loans might perform in an economic downturn, and the loss coverage should not be seen as a guarantee of performance. The loss coverage for each group of loans reflects that bad debt rates are projected as a range.

Disclaimer

This material contains certain tables and other statistical analyses that have been prepared by Funding Circle. Numerous assumptions have been used in preparing this statistical information, which may or may not be reflected in the material. The statistical information should not be construed as legal, tax, investment, financial, or accounting advice. The Information is provided as of the dates shown and is subject to updating and revision, and may change materially without notice. Subject to applicable regulations, no person is under any obligation to update or revise the information. The information may contain various forward-looking statements, which are statements that are not historical facts and that reflect Funding Circle’s beliefs and expectations with respect to future events and financial and operational performance. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond the control of Funding Circle and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. Nothing contained within the information is or should be relied upon as a warranty, promise, or representation, express or implied, as to the future performance of any loans. Any historical information contained in this statistical information is not indicative of future performance.