How to react to a crisis – Jasmine Birtles

Jasmine Birtles is a TV and newspaper journalist and personal finance expert. In her column she’ll be helping you get the most from your investment and reach your personal goals. 

“Be fearful when others are greedy, and greedy when others are fearful,” said Warren Buffett, the fourth richest man in the world.

Buffet, the CEO of the mega-successful corporation Berkshire Hathaway, has spent a lifetime investing in companies – sometimes buying the company in its entirety – and making insane profits for himself and investors in his company. In 1980, a single share in Berkshire Hathaway cost just under $300. Now it would set you back over $250,000.  So you can see that Buffett knows what he is talking about. At age 89 he’s seen a few economic ups and downs in his life too. 

Take the long view

To someone like Buffett, this is a ‘buy’ opportunity, or it soon will be. He and other calm investors take the long view. They are not fazed by volatility, they relish it. Buffett and his team have been analysing companies ripe for investment for years and they then play a waiting game, waiting for them to drop in price enough for them to pick up a bargain. 

Finally shares (or stocks as they call them over the Pond) are looking cheap, and at some point soon he will start to buy and buy big. Buffett is a ‘buy and hold’ kind of guy, holding companies for years…even decades…as he knows that it’s pointless to bother about what happens to the market in the short-term but that over time, good investments will go up.

For example:

  • In 1975 the stock market lost 72% of its value. Over the next twelve months it jumped back up by 100%
  • The 2008 financial crisis was a time of utter market turmoil, but if you happened to have £1,000 in an average investment company just before the crash it would have grown to £2,348 today

In other words – wait it out and you will win.

Be contrarian

Right now I’m seeing questions on social media along the lines of: “Should I sell my shares and ditch my pension? Should I just get rid of all my investments and stick the money under the mattress”.

My answer is ‘don’t panic – go against the crowd’. When all around are losing their heads and selling their investments, stand firm and don’t be spooked.

Buying high and selling low is exactly what we shouldn’t be doing. We need to do the opposite, which is why Buffett and his ilk tell us all to be fearful when others are greedy (i.e. don’t buy when everyone else is buying) and greedy when others are fearful (that is, buy when everyone else is selling).

Should you worry about your pension?

No. If you’re more than ten years away from your retirement, you can ignore the losses you will be incurring right now. 

At some point – maybe in a few months or maybe next year – the stock market will bounce back again. In fact, I think that when it bounces back it will do so in a really BIG way. Even if it’s just a moderate bounce back, though, it will be worth the wait.

If you’re coming up to retirement it’s likely that your company or private pension is being ‘lifestyled’, which means that your money has already been moved out of equities (shares) and into less volatile, more boring investments such as bonds, gilts and cash. You might have lost some money that was invested in the stock market part but overall, not nearly so much.

If your pension hasn’t been lifestyled then it’s worth looking at putting off retirement for a bit, unless you have decent pots of cash elsewhere to give you a good standard of living.

What about your Funding Circle money?

Very sensibly, you have ‘diversified your portfolio’ by also investing in peer-to-peer lending products, like Funding Circle, where you lend to small businesses. It’s likely that returns on this investment will be lower for a while as small businesses are under more pressure financially.

But now is not the time to sell investments. While economic troubles cause issues short-term, once they’re over, economies bounce-back. 

The more mature peer-to-peer platforms like Funding Circle have had 10 years to work on their risk modelling and preparation for such events, which stands them in good stead. As you’d expect, they’ve also made some changes to their lending criteria to protect returns.

With the large injections of cash that the Government is putting into the economy, together with quantitative easing and the drop in interest rates, businesses have a lot of support and can pick again when this is over.

As with shares, it’s about playing the long game and ignoring short-term ups and downs for the bigger picture, which takes longer to become clear.

Should I buy or should I go now?

For most people, this is a dip that will be followed by a bounce, so keep your head and your money in the same place.

In fact, if you haven’t already filled your £20,000 ISA allowance this tax year, consider putting some in by April 5th, either in equities or Alternative Finance or a mixture of the two. 

I’m not saying that we have hit the bottom of the market yet – no one can call that accurately – but we are certainly a long way down and, as China has already started to go back to work, it’s likely that the upturn, or flattening out at least, won’t be too far away.

Having said that, no one really knows when the market will be up or down, so rather than pull your money out in one go, or even buy everything you can in one go, the best strategy is to invest small amounts of money into a range of products (peer-to-peer lending, equities, bonds and so on) every month, whether they are up or down, so that you get a mix of good and bad. 

In the final analysis, if you wait for long enough, you’re more likely to win.

The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice.

To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here. If you have any questions, please speak to your professional adviser or seek independent specialist advice.

By lending to businesses your capital is at risk. The tax-free entitlement of an ISA depends on your circumstances and may change. Funding Circle is not covered by the Financial Services Compensation Scheme.

Chief Risk Officer’s UK update – Protecting your returns over the coming months

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 markets Funding Circle operates in: including data scientists, credit risk analysts and credit assessment experts.

In this update, Jerome talks through how the current coronavirus developments may affect the businesses you lend to, and the work we have done to protect your returns throughout this period.

We are prepared for this period of uncertainty

Firstly, I hope that you and your loved ones are keeping yourself safe and healthy during this time; your wellbeing is important to us. At the same time, I am aware that many of you will be feeling anxious about what the current situation means for your investments. As the impact of the coronavirus continues to make itself felt across our country, I wanted to provide you with an update. 

Over more than twenty years in risk management, I have experienced three credit crises and a recession. While economic disruption and dislocation causes short-term pain, economies do bounce back as people return to their daily lives. While we do not yet know the full effects of this crisis on the UK economy, this time will be no different. Part of my role as Chief Risk Officer is to prepare for these events, and my team has been working hard to protect your investment.

Coronavirus has restricted economic activity

The spread of coronavirus has restricted the ability to take part in economic activity. As people temporarily cut back on spending, small businesses are affected in different ways. Some, such as restaurants, have felt an immediate impact as they are forced to temporarily close. Some businesses may start to feel the effects later if the economy slows down. Many businesses, like farmers or doctors, are likely to continue to trade normally throughout. As your lending is diversified across lots of small businesses, your portfolio will contain a mix of the above. 

However, I firmly believe that we are entering this challenging time in a strong position. We have leveraged over ten years of business lending data to build powerful risk controls, my team has a wealth of experience in risk management, and our loanbook contains quality and creditworthy businesses. In addition, over the last week the Chancellor has announced a range of unprecedented and wide-ranging measures to provide ongoing support to the UK’s small businesses. This will go a long way towards mitigating the economic impact of the virus.

Protecting your returns is a key priority

Funding Circle has the right tools to navigate the coming months. Operationally, our staff are already equipped to operate remotely, they are working from home and continuing to serve our customers efficiently. We are also the best-capitalised lending platform in Europe. When we became a public company in 2018, we raised a significant amount of capital and at the end of last year we had c. £320m in equity capital.

This means that Funding Circle has sufficient cash to weather uncertain periods. Importantly, we are also able to make decisions that prioritise protecting investor returns over short-term commercial interests. As part of this, my team has introduced the following measures: 

  • We have tightened our credit risk parameters – Last year we tightened our lending in response to changes in the macroeconomic environment. In light of the current situation we have decided to initially take a prudent approach and extend this tightening, strengthening our criteria for businesses from vulnerable areas of the economy. We have also adjusted our pricing—taking into account how the economy may perform—to maintain projected returns for new loans at current levels. We are focused on originating loans that we expect to be resilient during this period.
  • We have enhanced our risk monitoringWe have always paid close attention to changes in both our loanbook and the wider environment. This has been heightened, with my team frequently analysing data for more detailed insights, in order to quickly spot and understand signs of stress as they emerge. With this, we are ready to make rapid and effective adjustments to our credit parameters if needed.
  • We have strengthened our collections and recoveries capabilitiesWe are dedicating extra resources to our Collections and Recoveries team to support the businesses you are already lending to. Some businesses may need help to cover short-term costs in the coming months; ensuring we have the people and tools to bridge these periods will help support these businesses and get them back on their feet, maintaining your monthly repayments over the long-term. Ultimately, our goal is to minimise any credit losses that could have been avoided.

Our loanbook has been built to remain resilient

Forecasting is never an exact science. It’s impossible to predict exactly how the economy will perform in the future, especially in a fast-moving situation. However, a key pillar of our risk management function has always been to build a resilient loanbook that is well-positioned to withstand an economic downturn.

For example, our loans have been priced so that if bad debt were to increase multiple times over, our loanbook would still be likely to deliver positive returns overall, once loans have been repaid and recoveries received. We will continue to monitor the environment closely, and regularly refresh our loan projections through our loan statistics page using the latest available data.

Your lending is supporting the economy at a vital moment

Small businesses are vital to the success of the UK economy; they provide 50% of GDP and 60% of private-sector jobs. Over the coming months, there will be good, creditworthy businesses in need of help. Their ability to access finance will be more vital than ever, and your lending will form an integral part of this support.

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

Jerome Le Luel

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.

An update on coronavirus 

With the impact of coronavirus continuing to be felt, we know that many of you are concerned about your investment and the wider financial landscape. We want to reassure all our valued investors that we are taking appropriate measures to respond to the situation, and give you some detail on the various issues going on at the moment.

Protecting investor returns

As a responsible lending platform, protecting returns through this period is our priority for investors. We have already made changes to our risk models and we’ll continue to closely monitor our credit policies and make further adjustments where necessary to protect your returns.

You can read more about the steps we’ve taken to protect your returns in our Chief Risk Officer’s update.

We’re open and here to support you

We are well set up to continue to support you and all our customers throughout this period. Following government guidance to work from home where possible, our team is already working remotely. 

Over recent years we have taken many steps to build a long-term business that can remain resilient through uncertain times. We are a very well-capitalised business and are well prepared to support investors and businesses.  

Supporting businesses that are affected 

We have always prided ourselves in serving the thousands of small businesses that are an important engine of growth for the UK. We know that some of them will be affected by coronavirus and we are working with them to support them through this difficult period. We have increased capacity in our teams to provide support, helping them to navigate this difficult period and continue to service their loans. We have a range of potential measures we can use and work with each business on an individual basis.

Changes to the Bank of England base rate and stock market volatility

The Bank of England announced it is cutting the base rate to 0.1%. This move does not affect your projected return, as each loan is assessed on a case-by-case basis and given a fixed interest rate. 

There has also been a lot of volatility across stock markets recently. As you lend to a diversified portfolio of loans on fixed terms, your returns are not as exposed to the price movements that occur on stock markets.

We’re here to help

This is a fast-moving situation and we’ll be providing more information in the coming days. As always, if you have questions about your account or any of the above, please get in touch with our team at contactus@fundingcircle.com.

Many thanks

The Funding Circle team

 

Building a long-term business

We want you to have the best experience possible when lending through Funding Circle. When we founded the business 10 years ago, we opened up small business loans as an asset class, allowing members of the public to lend to them for the first time. 

Since then more than 90,000 investors have lent over £6.2 billion through our platform, helping over 57,000 businesses to grow and achieve new success. Investors have earned c. £330 million in interest along the way, and loans taken out since 2012 are on track to deliver returns of 4-7%*.

As our business and the industry has evolved, we’ve continued to adjust and improve our service. Today we’re as committed as ever to helping investors earn attractive returns, and we’re excited about what the future holds.

New regulations will help set industry standards

We’ve always been big supporters of regulation, and believe the new regulations are really positive and set a good bar across the industry. We’ve seen some businesses closing their doors as a result, but overall I think we’ll see a stronger, more mature industry going forward.

The FCA has been consistent with what they set out to do, reviewing the market as it has evolved. There have been a variety of innovative business models, so it’s a natural progression that as more regulation has come in, some providers have left the market. Those that remain will be the more resilient lenders who can provide for investors and borrowers alike.

A diverse community of investors makes us more sustainable

We want to have a very sustainable platform that will last long into the future. In order to do that, we need diversity of funding that delivers great returns across all the different funding sources. That’s why, at Funding Circle, individual people (known as ‘retail investors’) lend alongside larger institutions.

The loans you get as retail investors are the same loans that institutional investors get. We think that’s a real positive – you are investing on the same terms as institutions are, getting the same product and the same returns.

Other platforms have chosen to close their retail business, but at Funding Circle you remain a key part of our long-term plans.

Adjusting our credit criteria to help returns

We focus on making sure that our loan book and our credit models are as resilient as they can be. We regularly stress-test our loans to see what could happen in different scenarios and, even if losses doubled, overall returns would remain positive. 

Last year we tightened our lending criteria. This was in response to some higher risk loans showing lower returns due to the macro environment, and the initial results show that this has helped improve returns. You can read more about this in our recent update from Chief Risk Officer Jerome Le Luel

As well as adjusting our lending criteria, we also made changes to how investors sell loans. We launched a new tool that allows investors to sell a portion of their loans regularly, so that they start getting funds back more quickly. 

Our share price may change, but we’re focused on building a long-term business

It’s important to remember that the return you make depends on the performance of loans in your portfolio, and is not affected by our share price.

In 2018 we chose to list Funding Circle on the London Stock Exchange. By becoming a public company we were able to raise a significant amount of investment and, as a result, we’re a very well-capitalised business. This not only makes us more resilient, but means we can be more innovative, launch new products and not be reliant on raising equity funding.

The share price will move up and down, often due to things that aren’t in our control. However, our focus is on how we build a really great long-term business, that supports thousands of small businesses and provides great returns for our investors.

Building for the future

We recognise that a key cornerstone of our success has come from the thousands of investors who choose to lend to small businesses through our platform. You create jobs, support communities and drive the economy forward, and we’re proud to help you make a real impact on the country.

We believe the best way to continue to support you is to create a really resilient, sustainable business that will last for many years to come. We’re excited about the future, and we’ll continue to listen to your feedback and keep working to give you the best experience possible.

Lisa Jacobs – UK Managing Director

Remember, by lending to businesses your capital is at risk, Funding Circle is not covered by the Financial Services Compensation Scheme. Data correct as of 31st December 2019. 

*Loans taken out since 2012 are projected to deliver annualised returns between 4.0 – 7.4% after fees and bad debt. It can take up to five years for loans to be fully repaid, so these ranges take into account how loans are currently performing and how we expect them to perform in the future. Data is from Funding Circle. Find more detail at fundingcircle.com/uk/statistics

Funding Circle publishes 2019 Full Year Results

As a public company, each March and August we publish our Full and Half Year results. Following today’s publication of our 2019 Full Year Results, we wanted to take a look back over some of last year’s highlights, and update you on some of the exciting things we have been working on.

2019 review of our UK business

A record £1.6 billion was lent to small businesses through the Funding Circle platform in 2019. At the end of the year, tens of thousands of small businesses were benefiting from more than £2.6 billion in loans under management; including a school uniform supplier in Bridgend, a bridal shop in Essex, and a windsurf instructor on the Sussex coast. Your lending is directly contributing to the jobs, tax receipts and economic growth these businesses create.

2019 was also a year of challenge, economically and politically, for the UK —which we were not immune to. Our Chief Risk Officer has previously discussed how we proactively tightened lending in response to some higher risk band loans showing lower returns due to the macro environment. While this affected the proportion of borrower applications that we could accept and our revenue growth expectations for the year, this prudent step protected investor returns. The early signs have been positive, with the chart below showing the percentage of loans, three months after being taken out, that were 10 or more days late.

Percentage of loans (by loan amount) 10+ days late, 90 days from origination

Source: Funding Circle

Loans originated in 2019 are expected to deliver annualised returns of 5–7%.* In times of uncertainty, it’s important we are prepared to do the right thing for the long term future of the business—and the investors who lend through our platform—even if it means slowing growth or affecting our profitability in the short term. We will continue to take this approach in the future. While it’s too early to predict any impact of the ongoing development of the coronavirus, we are continuing to monitor the situation very closely and are prepared to make prudent and timely adjustments where necessary.

Continuing to deliver for investors

As part of our strategy to diversify funding sources, we further widened the universe of investors who lend through our platform in 2019 by launching new institutional investor products; including a Funding Circle-sponsored, asset-backed bond programme and a UK Economic Impact Fund. Continuing to deepen and diversify our sources of investor funding will help to ensure Funding Circle continues to channel funds to small businesses throughout each stage of the economic cycle. 

For retail investors, we also made improvements to the secondary market in December; providing investors with an equitable and more regular way of accessing available liquidity. We’re pleased that these changes are enabling all investors who wish to access their funds early to sell loans regularly.

Helping more businesses access the finance they need to grow

Over the last ten years 57,000 UK businesses have accessed more than £6.2 billion in finance through Funding Circle. In the last three months of 2019 net lending to small businesses—the difference between new lending and repayments received on existing loans—through Funding Circle was higher than the major UK banks combined.    

However, we know there are more small businesses who we can serve. To help achieve this, in 2019 we introduced a major platform innovation; the completion of the initial build of our new instant decision lending platform. This will provide a best-in-class borrower experience, enabling greater speed and ease of access. 

The new platform includes historical data on approximately 1 million loan applications from the last ten years and is powered by Funding Circle’s 8th generation of artificial intelligence-enabled credit models. By utilising best-in-class technology and data analytics, we can deliver a revolutionary borrowing experience without compromising our assessment process. We are piloting this new technology for a small number of businesses initially, and will begin rolling out this market-leading functionality to approximately 50% of businesses by the end of 2020.

We are well-positioned for a successful 2020

Our work over the last twelve months has put Funding Circle in a strong position that will allow us to serve our customers well. Investments in our data and technology capabilities will help us deliver improved investor returns, deep and diverse sources of funding and an unbeatable borrower proposition.

In 2019 we grew group revenues by 18% to £167 million, while our UK business—our largest—delivered an operating profit in the second half of last year, with revenues of £108m. Following our Initial Public Offering, Funding Circle is the best-capitalised lending platform in the UK.

We also operate in the US, Germany and the Netherlands; whose markets are collectively six times as large as the UK**. In the US, our lending to small businesses would place us inside the top 50 largest US banks. In Europe, we are reorganising our German and Dutch businesses towards a new model that is better suited to those markets and will help accelerate our path to group profitability. We are well-positioned for a successful 2020.

By lending to businesses your capital is at risk. Not covered by the Financial Services Compensation Scheme.

The Funding Circle team

*Projected returns as of 31st December 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.

**Source: OC&C estimates

Get up to £500 in Amazon Gift Cards when you add and lend funds

For a limited time only, you can receive gift vouchers when you lend £15,000 or more through your Funding Circle account! Transfer funds into your ISA account today and you could treat yourself to an Apple Watch, an Amazon Echo, a new wardrobe or whatever you need with Amazon gift vouchers.

What value Amazon vouchers can I claim?

The amount you receive depends on how much you add to your account and lend to businesses:

  • Add £15,000 to get £150 gift card
  • Add £20,000 to get £200 gift card
  • Add £30,000 to get £300 gift card
  • Add £50,000 to get £500 gift card

What do I need to do?

Add funds to your ISA account and lend the amounts above by 30th April 2020 to get the voucher amount you want. The amount you lend will determine how much you’ll qualify for. If you have both ISA and Classic accounts, we’ll look at the amount added between them.

You also need to have lending switched on and keep those funds lent out until the end of June 2020. If you withdraw funds you may qualify for a lower voucher amount or no longer qualify. Read our blog for more detail. Terms apply.

Remember, tax rules depend on your circumstances and may change. Capital at risk. Not covered by the Financial Services Compensation Scheme.

Enjoy lending,

The Funding Circle team