Chief Risk Officer’s Update – December 2018

Jerome Le Luel joined Funding Circle as Global Chief Risk Officer three 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. 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. Their role is to help ensure you can earn attractive returns by deploying industry-leading risk management techniques and models.

In the first of a bi-annual series, Jerome will provide his view of what has been happening in the wider economy, and what this means for the businesses you lend to.

The economic environment has created favourable lending conditions

Investors lend through Funding Circle to small businesses in the UK, US, Germany and the Netherlands. Looking at these four economies in detail we can see that they have all recovered from the 2008 recession, with sustained growth in Gross Domestic Product (GDP) over the last four years:

1. GDP growth %, year on year

Source: Federal Reserve, ONS, OECD

In each of these markets, central banks have set historically low interest rates, making the cost of borrowing affordable and stimulating economic growth. Where interest rates have risen they have done so very gradually, to avoid triggering another recession:

2. Central bank interest rates

Source: Federal Reserve, BoE, ECB

This has resulted in strong levels of job creation and low unemployment rates:

3.Unemployment rate

Source: Federal Reserve, ONS, ECB OECD

This positive economic environment has created conditions that are highly favourable to lending. As a result, credit defaults for businesses have reduced significantly following the recession.

4. Small business insolvencies (Q1 2008 = 100)

Source: Paynet, Gov.UK, DESTATIS, CBS Statistics Netherlands

Across the US, Germany and the Netherlands consumer defaults are also at historic lows. However, the UK has seen an increase in the number of consumer insolvencies over the past two years:

5. Consumer insolvencies (Q1 2008 = 100)

Source: Federal Reserve, GOV.UK, DESTATIS, CBS Statistics Netherlands

This has been driven by a steady increase in consumer borrowing since 2013 as wages struggle to keep up with the cost of living. We haven’t seen this replicated in the UK small business space, as banks continue not to focus on small business lending. This can be seen below by the total outstanding stock of loans to small businesses, which is lower now than it was in 2011.

6. Outstanding loans to UK consumers and small businesses (£bn)

Source: BoE

However, the trends we have been seeing in the consumer space are having a knock-on effect on the overall insolvency rate of small businesses in the UK, which as we saw in graph 4, has risen slightly in recent months (although is still below pre-recession levels). For example some business owners—especially smaller ones—may be more reliant on personal credit cards than business bank overdrafts when managing the ongoing cash flow of their business.  

This trend looks to be isolated to the UK, with consumer and small business insolvency levels remaining low in the US, Germany and the Netherlands.

Loan performance has been strong

Investors lending through Funding Circle have continued to earn attractive, stable returns. Across our four markets, loans taken out since 2016 are projected to deliver returns of approximately 4 – 7% per year, after fees and bad debt.

Projected returns* after fees and bad debt, all markets

Source: Funding Circle

The consistency of these returns is reflected in recent lending commitments from some of the larger investors who lend through the platform. In addition to a new £150m funding facility from the British Business Bank (the UK government’s development bank), over the past few months two well-established institutions have committed to lend $1 billion and £1 billion to small businesses in our US and UK markets respectively.


We have seen consistent improvement in the performance of US loans since 2016. This has been driven by two key factors: an increase in the proportion of lower risk businesses accessing finance through the platform, and the increasing maturity of our risk models, now in their fourth generation in the US.

Projected returns after fees and bad debt, US

Source: Funding Circle


We have adjusted our pricing to reflect that base interest rates are rising faster in the US than our other markets, and loans originated in Q1-Q3 2018 are currently projected to earn investors 5.8% – 7.8% after fees and bad debt.


Although the credit environment for small businesses remains strong, as mentioned the outlook for consumer credit in the UK has worsened in recent years. This has impacted a small population of loans in our higher risk bands who can be more susceptible to shifting trends in the consumer credit environment. These headwinds are reflected in the projected returns for our 2016 and 2017 cohorts, which are 5.4% – 6.3% and 5.2% – 6.2%.

Projected returns after fees and bad debt, UK

Source: Funding Circle

We regularly update and improve our assessment models, leveraging more than eight years of loan performance data, and we made adjustments in recent months to account for this. These include tightening some of our credit policies and deploying our latest risk model, incorporating data directly from an applying business’s bank. The loans that have been taken out following these adjustments are projected to deliver investors returns of 6% – 7% after fees and bad debt.


Since Funding Circle acquired a business in the German market towards the end of 2015, we have seen significant improvements in loan performance; supported by the implementation of learnings and best practices from our more developed markets.


Projected returns after fees and bad debt, Germany

Source: Funding Circle


We expanded into the Netherlands at the same time as Germany, and we have seen similar levels of improvement over the past few years. In both markets we have developed our in-house Collections and Recoveries capabilities, and are now seeing recovery rates at similar levels to the UK.


Projected returns after fees and bad debt, the Netherlands

Source: Funding Circle

This serves to highlight the self-improving nature of lending; the more businesses that access finance through lending platforms, the stronger and more predictive risk models become. This allows us to price loans with even more accuracy.

The outlook for the economic environment is encouraging

Across all of our markets we believe that conditions remain encouraging for small businesses. In the US the economy is on a strong trajectory, stimulated by recent tax measures that have provided incentives for businesses to make investments. Although the US economy may be closer to the end of the business cycle than the start, the fundamentals remain strong and the small business credit environment is likely to remain positive in the medium term.

In the UK trading conditions remain favourable, although Brexit is creating a degree of uncertainty. We can’t predict the outcome of negotiations between the UK and the European Union, however our stress modelling (see below) shows the UK loanbook is in a strong position to weather any potential economic fallout.

The economic recovery started later in Germany and the Netherlands, so there is likely to be further to run before the end of their business cycles. Both Germany and the Netherlands are export-oriented economies; they tend to sell more goods to other countries than they buy. This means there is the potential for some exposure to the rising political and international trade tension we have seen in recent years. However, overall we remain positive about the stability of the German and Dutch small business environment over the next few years.

We are confident returns will remain resilient through a recession

A deep understanding of credit risk, and first-hand experience of managing multi-billion pound lending portfolios—particularly through the 2008 recession—has taught me that although lending is cyclical, careful monitoring and a prudent approach can provide investors with attractive returns throughout every stage of the economic cycle. When downturns happen, defaults do increase. However, it’s important to remember the vast majority of borrowers should remain financially healthy.

At Funding Circle, we rigorously prepare for changes in economic conditions. Part of this is to regularly stress test the loans in each of our markets. To do this we take a base scenario**—the projected returns from loans being originated today—and using a bespoke stress testing model, apply a number of adverse scenarios recommended by each market’s central bank. This allows us to simulate what could happen to the projected returns established in our base scenario. Although every recession is different, the results show that even in severe economic conditions investors should still be expected to experience positive returns:


2018 Funding Circle stress test results

Source: Funding Circle Stress Test 2018.

These results assume that no action would be taken to mitigate losses in the event of a downturn. In reality, we carefully monitor loan performance for signs of stress. If there were signs that conditions were worsening, we would make adjustments to account for some of its effects: for example tightening our assessment process, or calibrating prices on new loans. These actions should mitigate some of the adverse impact on investors’ returns.

Although we can’t predict when and how the next recession will happen, my experience tells me that we are ready. We are originating resilient loans in all of our markets, and we have the right tools in place to mitigate economic stress if needed.

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.

Jerome Le Luel

*Projected returns as of 30th September 2018. 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.

**Base case scenario taken from projected returns of loans originated Dec 2018.

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.

Digging into the data: How your lending helps the UK economy to grow

At Funding Circle, we’re proud of what you have achieved by lending directly to small businesses. Since 2010, more than 75,000 investors have earned an average return of 6.4% per year after fees and bad debt. In addition to earning attractive returns, you’ve also had a significant role in supporting the growth of the UK economy.

Your contribution has been highlighted by research published today by Oxford Economics, a leading economic consultancy firm. Their report, which can be seen in full here, reveals how small businesses are using the funds you lend them to:

  • Create and sustain tens of thousands of British jobs
  • Add billions of pounds to the UK economy
  • Make a significant contribution to UK tax receipts

In this blog, we will investigate how businesses use their loans and how this benefits communities across the UK.

Your lending is an increasingly vital source of funding for small businesses

Small business isn’t small. It forms the backbone of the UK economy, accounting for approximately half of the UK’s GDP¹ and 60% of private sector employment.² Between 2011 and 2017 the number of small and medium enterprises (SMEs) in the UK grew by 28%.³

Despite the demand for small business finance increasing, banks have continued to focus on funding larger businesses. The proportion of outstanding bank loans held by SMEs fell from 38% to 35.6% during this same period.⁴ Your lending is helping to bridge this gap, with over £3.4 billion lent to businesses through Funding Circle since 2010.

2017 net lending figures, Funding Circle and UK banks

Net lending in 2017  

Source: Bank of England, Funding Circle

If small businesses across the UK are to thrive, it’s important that the total amount of credit available to them grows. The above chart shows the net lending—the difference between new lending and repayments received on existing loans—of both Funding Circle and the 30 largest UK-resident banks combined in 2017.

Net lending is used by the Bank of England to discover the new amount of lending to small businesses throughout the economy. When looking at new sources of finance for small businesses, investors like you are providing nearly as many new funding opportunities as the entire UK banking system put together. Investors lending through Funding Circle created £598 million in net lending, compared to £677 million for all UK-resident banks.

When small businesses win, we all win

To help determine the full impact of your lending, in February 2018 Oxford Economics surveyed more than 500 UK small businesses owners who had previously taken out a loan through Funding Circle. They found that small businesses use the funds you lend them in three key ways:

You can be proud that you not only help the businesses you’re lending to, but your lending also has positive knock-on effects throughout the economy.

You lend to businesses based all over the UK

These benefits are being felt by businesses all over the UK. The chart below shows where businesses who accessed finance through Funding Circle in 2017 are located:

Loans made to UK businesses in 2017, by local authority district

As you can see, in one year alone your lending has benefited towns and cities from every corner of the UK.

Your impact on the UK economy

Business owners were asked about topics such as their revenue, job creation, and tax payments. Oxford Economics were then able to determine the overall impact investors’ lending is having on the UK economy.

For example, the chart below shows the direct, indirect and induced economic impact of the outstanding funds lent by investors in 2017:

The economic impact of outstanding loans in 2017

Source: Oxford Economics

From this you can see three key areas of the UK economy where your lending is having a significant impact:

  • Your lending creates and sustains jobs – In 2017, investors’ lending supported 45,000 jobs across the UK, either by creating new jobs, or preventing existing ones from being lost.
  • Your lending boosts the overall economyIn 2017, investors’ lending supported a gross value added⁵ contribution to the UK economy of £2.4 billion.
  • Your lending grows the public pursethe taxes paid by small businesses help build schools and hospitals all over the country. In 2017, investors’ lending supported the generation of more than £700 million in tax revenues.⁶

Make a return and a difference

At Funding Circle, our aim is to allow you to earn attractive, stable returns by lending directly to businesses. Although the return you earn is important, it’s rewarding to take a step back and appreciate the positive impact your lending is having. By continuing to provide small businesses with access to the finance they need to grow, you are playing a vital role in the growth of the UK economy.

By lending to businesses, your capital is at risk.

Enjoy lending,

The Funding Circle team

¹  Source:

²  Source:

³  Source: ONS, UK business: activity,size and location — 2017, 1 November 2017.

⁴  Source: Bank of England

⁵  This gross value added measure of production, or GVA, is similar to the well-known gross domestic product measure (GDP). The only difference is that GVA is valued at the ‘basic’ price received by the producer, excluding taxes on sales such as VAT, rather than at the ‘market’ price paid by the purchaser, including those taxes.

⁶ The taxes included are corporations tax, employers’ national insurance and business rates paid by the firm, income tax and national insurance paid by its employees, taxes on the firms’ purchases from other firms, and VAT and duties targeting final consumers of the firms’ products.

Digging into the data: Stress testing the businesses you lend to

At Funding Circle, our aim is to build a sustainable platform that allows you to earn attractive, stable returns by lending directly to creditworthy businesses. To help achieve this, we rigorously prepare so you can have confidence in your portfolio remaining resilient during every stage of the economic cycle. Part of these preparations include regular stress-tests of the businesses you lend to, and we wanted to share the results of our most recent test with you.

What is a stress test?

Stress tests allow organisations to estimate how their assets are likely to perform during adverse economic periods. These tests form an integral part of any prudent risk management strategy, as they allow us to simulate what could happen to your returns during tough economic conditions, such as a recession. A recession is characterised by a sustained period ‒ typically two consecutive quarters ‒ of negative GDP growth.

What did we do?

We have built on previous tests carried out on the Funding Circle loanbook, in both 2014 and 2016, to make this year’s test the most sophisticated yet. Using more than 25 years of UK insolvency and macroeconomic data, alongside 7 years of small business lending data, our experienced credit risk management team have created a bespoke stress testing model. By applying the same scenario used to stress test the UK’s leading banks to this model, we can estimate how a major recession might impact the returns earned by Funding Circle investors.


The starting point for any stress test is to create a number of example portfolios and establish how we expect those loans to perform if the UK economy remained stable. We call this our base scenario. It’s also important to note that we aren’t stress testing any individual loans, instead looking at how overall portfolios would react under stressed conditions. We created two example portfolios:

  • Portfolio A – representing an existing investor, comprising all outstanding small business loans in the Funding Circle loanbook (as of June 2017).
  • Portfolio B – representing a new investor, comprising all small business loans made on the Funding Circle platform in the first six months of 2017.

In our base scenario we would expect Portfolio A to earn an annual return of 6.7%, and Portfolio B to earn 6.8%, after fees and bad debt but before tax.

We then simulated the effects of a recession to these two portfolios. This simulation is called a stress scenario, and it shows what could happen to returns if the UK were to enter a period of severe recession.

This year we haven’t included secured property loans within our example portfolios. This is because these loans make up an increasingly diminishing proportion of the Funding Circle loanbook (less than 10% as of June 2017). More information on how secured property loans could perform in a downturn can be found in last year’s blog.

Building the Funding Circle stress testing model

It’s important that our model accurately reflects how changing economic conditions impact the returns earned by Funding Circle investors. To do this we established a mix of key economic indicators, including inflation, unemployment and interest rates. Carefully combining the right mix and weighting of indicators allows us to estimate how small businesses react to changing conditions.

The chart below shows how closely the overall UK small business insolvency level (the number of businesses who are unable to repay their debts) tracks the insolvency level estimated by our model. This is especially true when looking at the last two major UK recessions, in 1990 and 2008.

Source: Office of National Statistics

This high degree of correlation gives us confidence that changes to our mix of economic indicators closely estimate how small businesses in the UK would react during a stressed scenario. As the Funding Circle loanbook is well-diversified across regions and sectors, and broadly reflects the overall make-up of small businesses in the UK today, we can expect that businesses you lend to will react similarly.

It’s worth noting that businesses that have been trading for at least two years, like the ones you lend to, experienced a lower than average insolvency level during the 2007/08 recession. Businesses borrowing through Funding Circle are on average 10 years old. In addition, approximately half of the businesses in the Funding Circle loanbook successfully traded through that recession, further highlighting their resilience.

Timing of a recession

It’s also important to consider the timing and duration of any stressed scenario when measuring its impact on small businesses. Defaults are not spread evenly over the life of a portfolio of loans, typically starting approximately four to six months after the loans are made, and decreasing again as the outstanding amount to repay falls. In addition, all of our small business loans amortise. This means borrowers pay back a proportion of their principal along with interest each month. The timing and duration of a recession, along with amortisation, reduces the impact of a recession on older portfolios of loans. You can see this from the illustrative graph below, showing what happens to the base default rate when you apply a recession to a portfolio of loans after 18 months:

You can see that the earlier a recession starts, the more significant impact it has on a portfolio of loans.

PRA scenario and results

We tested our example portfolios against the Prudential Regulation Authority’s (PRA) 2017 stress test scenario. This is the same test currently being undertaken by all major UK banks. The PRA scenario provides a range of macroeconomic changes designed to simulate a severe UK recession. By applying these changes to our stress testing model, we can estimate how our example portfolios would be impacted.

The chart above shows that the PRA scenario (in orange) simulates a recession more severe than experienced by small businesses in 2007/08. This recession would start immediately (June 2017), and last for 60 months. During the stressed period our model estimates that the default rate for small businesses would increase by 1.9x. In addition we have also assumed that the recovery rate on defaulted loans would reduce by 40%. The table below* shows how our two example portfolios would be impacted.

Even during this severe recession both our example portfolios remain resilient, although Portfolio B is affected slightly more due to the timing factors discussed previously.

Looking in more detail at how the returns experienced by Portfolio B change throughout the stressed period, even at the point where defaults are at their highest the projected return remains above 3.5% per year after fees and bad debt, but before tax.

When simulating a recession similar to 2007/08, the projected annual returns for our example portfolios after fees and bad debt but before tax are 5.3% for Portfolio A, and 4.9% for Portfolio B.

Validating our results

We wanted to ensure our stress testing model stands up to scrutiny, so you can have confidence that we’ve approached our work in the right way. To help us do this, we asked a leading financial consulting firm, True North Partners, to conduct an independent review of our stress testing and return forecasting models. They have confirmed that the methodology used was valid, and the results based on this methodology are an accurate representation of how your returns could be affected by an economic downturn.

Actively monitoring the economic climate

The results of our test assume that in a stressed scenario, Funding Circle would take no action to mitigate losses. However, we have a number of processes in place to help anticipate and react to worsening economic conditions. In addition to closely monitoring the performance of the loanbook, we also track external macroeconomic conditions to help us identify when a downturn may be approaching. If there were signs that conditions were worsening, we would adjust our credit assessment process to price in some of its effects of on new loans. You can read more on how we assess businesses on our blog.


We hope you’ve found this information useful. We’re committed to helping you earn an attractive, stable return that remains resilient even during the toughest times. You can read more about the performance of Funding Circle loans on our statistics page. If you have any questions please don’t hesitate to get in touch.

Enjoy lending,

The Funding Circle team

* GDP = Gross Domestic Product

CPI =  Consumer Price Index

BOE = Bank of England

** You can see how projected returns are calculated here.



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.

Digging into the data: What could happen to your returns in an economic downturn?

At Funding Circle our aim is to build a stable and sustainable platform, where you can earn predictable returns by lending to creditworthy businesses. Following the recent referendum result for the UK to leave the European Union, you may have questions about the impact any future economic uncertainty might have on your returns.

We have always made preparations to be well-equipped to weather periods of economic uncertainty, and wanted to share the results of a recent stress test we conducted.

What do we mean by ‘stress test’?

Stress tests are an integral part of any financial organisation’s risk management strategy as they provide estimates around what might happen in an economic downturn. We first conducted a stress test in 2014 to simulate what could happen to investor returns during a particularly stressed period, or recession. A recession is characterised by a sustained period ‒ typically two consecutive quarters ‒ of negative GDP growth.

What did we do?

At Funding Circle we have an experienced team of credit and risk analysts, who have many years of experience working at some of the world’s leading banks and financial institutions. Leveraging historical data available to us from leading credit reference agencies and our own database of over 15,000 UK businesses, we were able to apply a number of stressed scenarios to an example of a typical investor portfolio, to analyse the potential impact on investor returns.


The starting point for our stress test was to create an example portfolio, and to review how we expected those loans to perform if the UK economy remained stable. To broadly reflect the proportion of loans that have been originated over the last 12 months, we tested an example portfolio made up of:

  • 70% unsecured small business loans
  • 30% secured property loans

We estimated that these loans would deliver a 7.2%* annual return after fees and losses during a stable economic environment. By conducting rigorous stress testing, we were able to simulate what would happen to these returns should the UK economy enter a period of recession.

What data did we use?

As part of our stress test, we analysed a number of factors including macroeconomic indicators and specific indicators relevant to both small business loans and property loans.

Small business loans

1) Insolvency rate

When building the model we used data from the Insolvency Service, which shows the rate at which businesses are unable to pay their debts. This is known as the insolvency rate. Looking at the graph below showing the insolvency rate of UK businesses during the 2007-08 recession, you can see that the insolvency rate was two times (2.0x) higher at the peak of the recession in 2009 than it was in 2016.


Source: The Insolvency Service

We used this insight to guide our understanding for what the default rate for small businesses could increase by at Funding Circle during a recession. We also investigated specific segments of small businesses that share the characteristics of Funding Circle borrowers (such as turnover, trading length and number of employees) and found that for those businesses the increase in insolvency rate was actually 1.6x during the same period – suggesting less volatility than the average market. By examining the average age of Funding Circle borrowers, we could also confirm that the majority (56%) successfully traded through the last recession.

2)Timing and duration of a recession

Two other important factors we considered when estimating the impact of a stressed scenario on small business loans were the timing and duration of a recession.

Typically, defaults on a group of loans start to occur approximately six months after loans are made. This trend then naturally decreases over time from the second year. In addition, all of the small business loans amortise as borrowers pay back a proportion of their principal along with interest each month. Both factors are likely to reduce the severity of a recession that would start later, on existing loans.


The age of a group of loans at the time a recession occurs influences the magnitude of the financial impact. Therefore we have stress-tested both the existing book of loans, which are less exposed due to being partially matured, and an example portfolio of brand new loans, which are potentially fully exposed to recessions through their entire lifetime.

Property loans

Property loans are secured against properties. The major factor we considered when assessing the impact of any stressed scenario on property loans is a fall in the value of house prices. The graph below shows that during the 2007-8 recession, house prices across the UK fell by an average of 19% over 18 months.


To understand risks on this portfolio, house price fluctuations have to be compared with the loan-to-value (LTV) ratio, or the value of each secured property against the amount borrowed. The below chart shows the distribution of loans by loan-to-value bands for outstanding Funding Circle property loans. Data is correct as of 31st August 2016.

LTVWe looked at what would happen to the property portfolio if house prices fell by either 10%, 20% or 30%. Outside of our base estimated default rate of 0.5% a year for property loans, in the mildest scenario (10% fall in house prices) investors would be unlikely to experience an increase in defaults as the loan-to-value on any of the property loans does not exceed 85%.  Even in an extreme scenario where house prices fell by 30%, we estimated that the majority of the outstanding property loans would be well-placed to weather a recession.

Our stress test scenarios and results

For the first scenario, we simulated a recession similar to the one experienced in 2008. The second scenario was based on data from the Prudential Regulation Authority (PRA), where we applied a number of macroeconomic changes provided by the PRA to simulate a recession significantly more severe than experienced in 2008. For both scenarios we also anticipated that the recovery rate on defaulted loans would decrease by 33% during the stressed period.

Taking the estimated annualised net return of 7.2%* in our base case as a starting point, the results were as follows:


The existing example portfolio is likely to be resilient in both scenarios. New loans are also likely to be resilient, although with lower returns due to the timing impact. Also, in the case of a major recession, Funding Circle would take action to mitigate losses ‒ with such benefits not factored into this simulation.

We have a number of processes in place to help anticipate and react to worsening economic conditions. We monitor, with a lot of scrutiny, both the internal performance of our loanbook and external macroeconomic conditions. Looking at factors including changes to Gross Domestic Product (GDP), income gearing (how much income there is available for a business to service debt), Consumer Price Inflation (CPI) and the overall insolvency rate for UK businesses, we should be able to identify when a downturn may be approaching.

If there were indications that economic conditions were worsening, or that our loanbook was not performing as well as it should be, we would adjust our credit assessment process to price in some of the effects of an incoming downturn on new loans. You can read more on how we assess businesses on our blog.




These results show that investor returns are likely to remain attractive even in a recession deeper and longer-lasting than was experienced in 2007-08. We’re committed to helping investors earn attractive returns by building a stable and sustainable platform, and are confident this would remain the case even during the most adverse of downturns. Diversifying, where you spread your lending across lots of different businesses, can help your portfolio be more representative of the wider pool of loans we have tested. You can find out more about this here.

We hope you’ve found the above information useful, and you can read more about the performance of Funding Circle loans on our statistics page. If you have any questions please don’t hesitate to get in touch.

Enjoy lending,

The Funding Circle team

* Estimated returns are after fees and bad debts but before tax, and please remember by lending your capital is at risk. As you lend to your own individual portfolio of loans, your actual return may be higher or lower than our estimates. You can see how we calculate our estimated annual return at origination here.

Digging into the Data: The evolution of the assessment process

With the United Kingdom voting to leave the European Union, we wanted to assure you that despite the current political and economic uncertainty, Funding Circle has a robust credit assessment process to seek to ensure the businesses you lend to are resilient.

In this edition of Digging into the Data we will be looking at how our credit assessment process works in more detail, its development and improvement over time, and announcing the latest changes we are making. We will also discuss how we have stress tested our loanbook to seek to ensure Funding Circle portfolios are able to weather periods of volatility.

How does our assessment process work?

When assessing a business, we use a balanced mix of risk tools to ensure we create a full picture of the borrower’s financial health. These are centred around three key pillars; statistical credit models, expert judgment and policy criteria.

Statistical credit models

We have developed proprietary statistical credit models that rank potential borrowers by order of risk, taking into account thousands of individual criteria both from publicly available data sources (like credit reference agencies) and our own database of historical data (including more than five years of information on UK companies). These statistical credit models are used to assign a risk band to the loan, from A+ to E, and identify businesses we are unable to help.

As Funding Circle has grown over the last five years and more loans have matured, this has provided us with more credit performance data, allowing us to make even more accurate statistical credit models. Since we launched in 2010, more than 14,000 businesses have been funded on the platform. We regularly update our statistical credit models to ensure we leverage this valuable experience. As you can see from the below graph*, our 2016 models benefit from being built on a population size significantly larger than what was previously available to us:

1st graph

More data allows us to determine with more precision which factors influence whether a business is more or less likely to default on a loan. This means we get better at ensuring the right businesses are approved, creating more lending opportunities for investors while increasing confidence in the predicted loan performance. This accumulation of experience over time creates a virtuous circle:

2nd graph

Expert judgement

Alongside our statistical credit models, each business is manually assessed by a member of our credit assessment team.

Our team is made up of specialist small business credit assessors, with extensive experience working at some of the UK’s most well known banks. The team reference multiple sources of data; including financials provided by the borrower and leading credit reference agencies, plus the company directors’ own personal finances.

This creates a comprehensive picture of the business’ financial position – allowing the in-house credit assessment team to raise and clarify any potential questions with the borrower before making any lending decision. If the risk of default is deemed higher than our risk bands allow for, the business will be rejected.

By combining expert judgment with statistical credit models, we can make balanced credit decisions resulting in robust credit performance. More information on the expected and actual default rates for our risk bands can be seen on the statistics page.

Policy criteria

Funding Circle receives thousands of applications from small businesses, and having a simple set of policy criteria has enabled us to filter out businesses that have a low likelihood of being approved.

Policy criteria are designed to give direction to business owners so they know whether they may be eligible for finance. This means our credit assessment team only spend time on the right type of applications. As we have accumulated more data on UK businesses over the past five years, we have found that a certain number of creditworthy businesses might have been overlooked, despite being successful and healthy businesses.

To ensure we can help more creditworthy businesses, we regularly review these policy criteria and make any necessary adjustments, retaining the criteria that have proven to identify borrowers outside of our risk appetite. Our latest set of policy criteria are:

  • A minimum of two years trading history
  • At least 1 year of filed or formally prepared accounts
  • No outstanding County Court Judgments larger than £250

With the 2016 generation of statistical credit models and the latest version of policy criteria, we expect estimated average returns to remain consistent: for loans that were originated in 2016 the estimated average return is 7.2%**, with an expected annualised loss rate of c.2%. We also expect performance by risk band to remain the same, although as always, it is important to highlight that your capital is at risk when lending to small and medium businesses.

Consistent results over time

As a result of our improving statistical credit models, our ability to determine which loans are more likely to default has increased. When Funding Circle started, loans accepted on the platform had a similar default rate to those rejected at the final stage of the assessment process. As we have incorporated a wider variety of tools and data sources this ratio has improved, so that by 2015 loans rejected at the final assessment stage were five times as likely to default as those accepted on to the platform.

The below graph shows our bad debt performance against expectations for loans originated each year since Funding Circle started. The data shows the loss rate for loans after 12 months, net of total recoveries received for those loans, for each cohort as a percentage of our expected loss rate. Please note our 2015 cohort is not included as it has not yet seen a full 12 months of performance:

3rd graph

As losses are shown net of total recoveries, previous cohorts have received an additional 12 months of recoveries than subsequent cohorts. Over the last four years, loss rates on the platform have been consistently within or below expectations, despite making changes to our assessment process and introducing higher risk bands.

For up to date information on marketplace performance, including bad debt performance over time by year of origination, please visit our statistics page.

Are we prepared for a downturn?

Following the referendum result for the United Kingdom to leave the European Union, you may have questions about the potential impact an economic downturn may have on your portfolio. Although we are unable to predict exactly what will happen in the future, we have always made preparations to ensure that we are well equipped to weather periods of economic uncertainty.

In 2014 we invited an industry leading external consultancy, Hymans Robertson, to undertake a full assessment of our loanbook. Simulating economic conditions experienced in both the 1992 and 2008 recessions, we were able to see how returns could vary if we saw another downturn in the economy. The full results can be seen on our blog, and we are currently undergoing a new stress test with the results to be published in due course.

At this stage, we don’t expect any potential fallout from the referendum result to create a credit situation worse than previous recessions, and since the performance of our loanbook has remained stable over the past two years, we think that the 2014 stress test exercise still provides a relevant view of what an economic downturn could mean for returns.

In parallel, we have also deployed contingency plans regarding our portfolio tracking and collections activities, scrutinising any sign of stress and ensuring we are ready to take action quickly if credit performance showed any sign of deterioration.


We are committed to enabling investors to earn consistent attractive returns, by lending directly to British businesses and helping to support economic growth. We will continue to make improvements and adjustments to our assessment process, including in response to changing conditions in the wider economy, so you can have confidence lending to businesses through Funding Circle.

We hope you found this piece useful, and if you have any questions please join the conversation over on our forum, or if you have further questions about how our credit assessment policies work, you can watch a recent interview with our Chief Risk Officer, Jerome Le Luel, here.

Enjoy lending,

The Funding Circle team

* The graph shows the number of loans originated on the platform that were at least 12 months old, as of July for each year.

** You can see how our estimated returns are calculated here.

Digging into the data: how returns at Funding Circle compare to other investments

In this edition of ‘digging into the data’, we look at the historical performance of returns at Funding Circle over the last five years compared with other investments and peer-to-peer lending platforms. We also look at the tax investors will save if they take advantage of the new Innovative Finance ISA at Funding Circle, which is due to launch next tax year (2016/2017).

Funding Circle compared to other investments

First, we wanted to examine how the cumulative, or compounded, Funding Circle return compares to other investments, including equities and corporate bonds.

Funding Circle cumulative return vs. other investments

Source: FTSE 100 total returnsBloomberg Global Corporate Bond index (BCOR), Funding Circle

Looking at historical returns between 2011 and 2015, we can calculate that lending through Funding Circle during this time delivered a better cumulative return than investing in the FTSE 100 and corporate bonds. Investors earned an average cumulative return of 37% at Funding Circle, compared to 27% on the FTSE 100 and 12% in corporate bonds.

We can also see that the average cumulative Funding Circle return is more stable than investing in equities, which carries a larger risk of volatility in the short term.

It’s important to add that although other investments may have yielded lower returns on average over the last four years, they have other attractive characteristics such as providing a diversified portfolio across risk return profiles. Past performance is also not necessarily a guide to future returns, and your capital is at risk with any type of investment, including peer-to-peer lending.

Funding Circle returns versus other peer-to-peer lending platforms

Digging into the data in more granular detail, we examined how returns at Funding Circle have compared to two UK peer-to-peer lending platforms.

Because peer-to-peer lending is still relatively new, only a few platforms have a loanbook mature enough to indicate consistent returns. Therefore for this calculation, we looked at platforms (P2P1 and P2P2) which have originated over £1 billion of loans, and weighted the historical returns by amount lent in each year.

Funding Circle weighted return vs. other p2p platforms

Source: Peer-to-Peer Finance AssociationFunding Circle

Again it is important to note that past performance is not necessarily a guide to future returns, and your capital is at risk with any type of investment. Not all platforms operate in the same way and it’s important that each investor chooses the platform that is right for them.

However based on this, Funding Circle has delivered the highest of any major peer-to-peer lending platform.

This data includes our 2011 cohort (£17.3 million of lending out of £1.1 billion) which did not perform in line with expectations. If you remove this cohort, the weighted return between 2012 and 2014 increases to 7.06%. The data doesn’t include the 2015 cohort because it has not yet seen a full 12 months of performance. For more information on how individual cohorts perform against expectations, visit our statistics page.

How much tax could you save by lending through an Innovative Finance ISA at Funding Circle?

With the new ISA season just around the corner, and investors looking to make the biggest tax savings they can, the Innovative Finance ISA will be an attractive proposition for some.

If you decide to use your ISA allowance of £15,240 to lend to businesses through Funding Circle across 5 years at the current estimated return of 7.3%, you could earn an estimated £6,335 in interest, resulting in a total pot of £21,676.

By lending through a Funding Circle ISA account, you could save £1,334 as a basic rate taxpayer and £2,692 as a higher rate taxpayer.

As with all projections, the nature of modeling is that it provides an estimate.


At Funding Circle you can earn attractive returns and fuel the UK economy by lending directly to British businesses. To help maximise returns, investors should lend small amounts to lots of different businesses. Since Funding Circle opened its doors in 2010, every investor who has lent no more than 1% of their portfolio to at least 100 individual business has earned a positive return, and 92% have earned at least 5%.*

It’s only a few weeks until the launch of the Innovative Finance ISA so we hope you found this analysis useful. If you have any questions about these calculations, please join the conversation over on our forum.

Enjoy lending,

The Funding Circle team



* This data is based off actual returns for people lending for at least 1 year. For more information, visit our statistics page.


Peer-to-Peer Finance Association

FTSE 100 total returns

Bloomberg Global Corporate Bond index (BCOR)

Returns table 1

Returns table 2

Returns table 3

Digging into the data: how long does it take to receive recoveries?

Lending to businesses can deliver attractive returns to investors, while helping those businesses access the finance they need to grow. However, from time-to-time some businesses will be unable to repay their loans, which is why diversification is important. When this happens, the time it takes for recoveries to start reaching your account can vary but on average will take around 6 months.

What happens when a business falls behind with their repayments?

When it appears that a business is likely to miss a scheduled monthly repayment, we immediately contact them to understand their financial position and to see if we can help the business get back on track. We keep you updated on the borrower’s status by writing loan comments which are visible in your online account.

If you have any defaulted loans you may have noticed that we apply a RAG (Red, Amber, Green) rating system to help you assess the likelihood of recovery, and we update this RAG rating as we receive new information. Since we brought all of our collections and recoveries processes in-house in February 2014, we have made significant improvements in the number of loans late on their monthly repayments, and the recovery rate for investors.

In this blog we’ve set out some recent analysis in respect of the estimated recoveries and the period of time it takes to repay that money to you. These estimates:

  • are accurate as of 1 November 2015;  
  • are based on 3 months’ cash-flow on defaulted loans for the period August – October 2015, and extrapolated out for a maximum payment plan of 5 years;
  • do not include any interest payable (which we also seek to recover); and
  • give a 0p/£ recovery estimate to any defaulted loans that are in negotiation or in a court action (i.e. where there is no cash-flow). The estimates are on the conservative side, although we are currently collecting data so that all defaulted loans can have an estimated recovery rate at every stage post-default.

How long after a business defaults do I have to wait until I start seeing some recovery?

When a loan is defaulted, the business has usually failed. This is why most of the recoveries we see come through guarantors starting new businesses, realising assets or entering employment and providing us with a fair and affordable payment plan. Sometimes the guarantors will enter a formal insolvency procedure as a result of our enforcement action, action from another creditor or by themselves voluntarily. Unfortunately these options rarely give an immediate material recovery.  

Why is there a difference between actual and estimated recovery rates?

As you can see from the H1 2015 bars, it usually takes around 6 months before we have sufficient cash-flow to estimate a recovery over 5 years of just under 40p/£, and just over a year until the actual recoveries have reached 30p/£. We are still negotiating many of the defaults in 2015 H1, and we expect both the purple and blue bars in the graph below to increase.

Estimated and actual recovery rates by default date cohort

The estimated and actual recovery rate by when the loan was accepted

If we now look at recoveries on defaults by when the loans were accepted, we see that material recoveries of approximately 30p/£ can be expected within 3 years of the accepted date for those defaults, but for the same group the estimate over 5 years is nearer 40p/£. The reason for this is that there are less “new” defaults in older group of loans. New defaults dilute both the actual recovery rate and the estimated recovery rate, but have more impact on the actual recovery rate as there has been less time to build up recoveries.  

Recovery rates by origination cohort

As an aside, in February 2014 we received recovery on only 40% of all defaults.This figure has steadily climbed and reached a peak of 62-63% in April 2015, and has maintained this level since.

Where loans have defaulted, and we have made a recovery, approximately 80% are in payment plans (rather than insolvency procedures). On this basis we believe that defaulted loans that are originated in 2015 will ultimately recover nearer 45-50p/£.

How does the rate of material recovery change over time?


Proportion of defaulted loans for which a partial or whole recovery has been made

At Funding Circle we are committed to having the best collections and recoveries process in the industry. We are constantly looking to innovate and use technology to recover as much money as possible for investors, and further improve our communications with you. We always appreciate your feedback, so please feel free to send this to

A roundup of the first week with fixed interest rates

Fixed interest rates have been on the marketplace for just over a week since launching on Monday 28th September, so we wanted to share some initial insights into the trends we’re seeing. Many of you have asked for some details about how the first week has been, so we hope you find the below useful.


1) You helped 175 businesses across the UK access finance last week and £6.3 million of new fixed rate loans were listed on the partial loans marketplace.

2) 8 businesses had their loans listed and accepted in one day, meaning committed funds are being used efficiently and businesses are accessing loans faster than before.

3) Secondary market liquidity has increased with more loan parts selling, as a proportion of those listed, than previous weeks.

Speed of funding loans on the primary market

Before launching fixed rates we expected the average time taken for loans to fund to decrease. Last week, many of you will have seen loan requests filling particularly quickly, which was mainly caused by an increase in available funds and fewer loans available to lend to:

1) In the week before fixed interest rates launched, £5.4 million of loans were listed on the partial marketplace, compared to £6 million and £6.3 million listed in the previous 2 weeks. This created more available funds for the week commencing 28th September, contributing to loans filling quickly.

2) A small number of investor accounts were filling a high proportion of loans in the opening minutes of a loan request. This activity breaches our terms and conditions, as there is a  20% funding limit in place for each loan.

The median time to fund loans increased as the week progressed, from 1 hour on Monday, when an electronics company in Nottingham had their vehicle loan fund in just one minute, to 26 hours on Friday.

Whilst we want the marketplace to help businesses with fast access to finance, we recognise that some investors want time to carry out their own research. We’re working to strike a balance between fast access to finance and time for due diligence as we move forward.

How have fixed rates affected the secondary market?

The secondary market enables you to buy and sell loan parts with other investors, meaning you can build a diversified portfolio quickly.   

Over the past week and since fixed rates have launched, liquidity on the secondary market has increased with 94% of business loan parts sold when listed at par, 80% of loan parts sold with a discount and 45% sold with a premium, excluding property loan parts. This is based on the number of loan parts listed and sold in each week.

We’ve also seen a sustained rise in the proportion of loan parts sold at a discount since the beginning of September, further improving liquidity for you. Autobid has been updated so it can buy loan parts listed at a discount, and the maximum discount available when selling loan parts has also been increased from 3% to 20%.

LPs sold

What about property?

A lower proportion of property loan parts have sold during this period in comparison to business loan parts and this difference can be attributed to the cashback promotion we have been running on property loans. Comparing the lines on both graphs, discounted loan parts are selling for both business and property loans at a similar rate of 80%.

property LPs

Buyer rates on the secondary market

The weighted average buyer rates for loan parts which are currently on the secondary market are listed below, shown beside the current fixed interest rates on the primary market. These are gross interest rates, before fees and estimated bad debts and data is correct as of 5th October. Your actual return may be higher or lower as your capital is at risk.



We hope the information provided has been a useful snapshot of the marketplace today, a week and half since launching fixed interest rates for new loans. We are working to strike a balance between the experience of both investors and borrowers, so we will continue to monitor the speed of loans funding and take steps to ensure time is given to review lending opportunities.

The current funding process has proved to be more efficient than before, and we hope you see the benefits of your money working harder for you soon.

We’re over on the forum to help answer any further questions you have.

The Funding Circle team

Digging into the data: improving returns

Since the Funding Circle marketplace first launched, estimated annual returns have increased from 5.7% in 2011 to 7.1% in 2014. In this edition of the Digging Into The Data series we examine how interest rates have changed over time, what has caused these changes and why investors are now earning more.

Gross interest rates (bid rates) have been increasing over time

You can see in the graph below that since Funding Circle launched in August 2010, the average successful gross interest rate has increased 25% from 8.3% to 10.4%. Let’s look at the main reasons for this increase in more detail.


1) Introducing new risk bands has enabled investors to earn higher returns

The Funding Circle marketplace launched with 3 risk bands (A+, A and B) for investors to lend across. As we have grown and understood more about credit assessment we have introduced new risk bands (C and C-) to provide even more lending opportunities to help investors spread their lending across as many businesses as possible.

These newer risk bands have an attractive risk-return profile. Since being introduced in June 2012, more than £103 million has been lent to C businesses with an average gross interest rates of 11% and an expected net return of 6.4%. £32 million has been lent to C- businesses  since June 2013 at an average gross interest rates of 13.3% and an expected net return of 6.8%.

2) The introduction of Minimum Bid Rates has gradually increased gross interest rates

In 2013 we introduced Minimum Bid Rates across all risk bands. Prior to this change, the minimum gross interest rate you could bid on any loan was 4% across all risk bands. From the start of 2013 we saw a sharp fall in gross interest rates. As a result, in mid-2013 we introduced minimum bid rates to increase the overall net returns for investors. Since this introduction average interest rates have increased 24% from 8.4% to 10.4% by the second half of 2014.

Minimum  bid rates

3) We’re improving our ability to manage the supply and demand of the marketplace

Whilst the introduction of new risk bands and minimum bid rates has helped to increase the overall gross interest rates for investors, these rates fall if there is an imbalance in the marketplace. This means there are too few borrowers for investors to lend to and causes gross interest rates to fall, creating inefficiencies in the marketplace. This is one of the biggest challenges at Funding Circle.

In order to better balance supply with demand we have introduced a number of new initiatives over the last few years. These include TV advertising and partnerships with banks and accountants to increase demand from businesses. We’ve also broadened the types of investors who use Funding Circle to ensure we meet this increase in demand.

spread of investors

Improving credit policies leads to a decline in losses

Alongside increases in gross interest rates over time, improvements in our credit assessment and loan servicing policies have led to increases in the actual returns investors receive.

We publish information about the bad debt performance versus expectations on our statistics page and update this information monthly. These results show that since 2010 our credit assessment policies have consistently improved. This is down to the work our credit analytics team is doing to create better risk models, by using more and more sources of data.

We are also getting better at analysing the propensity of a business to default after they have accepted a loan. Looking at the below graph we can see that in 2013, for every accepted business that defaulted, 4 that were rejected ended up in default, this is a 3X increase compared to 2011.

Bad debt performance over time

Finally, the loan servicing team have brought down the number of businesses that are late paying from 1.5% to 0.7% as a proportion of all live loans. When a business does default the loan servicing team work to reclaim as much of the loan as possible. Currently the recovery rate for defaulted loans is 19.4p, and this rate has steadily increased  from 14.6p since we started managing defaulted loans in-house. Long term, the expected recovery is anticipated to be ~40p – increasing to 44p for loans that defaulted in the first half of 2014, and 47p for defaulted loans in the second half of 2014.


We hope you enjoyed this post about the improving investor returns on Funding Circle. With future changes such as ISA introduction and new tax relief for investors, we expect that lending to businesses through marketplaces will become even more attractive for investors over time; however it is important to note that interest rates can go down as well as up as your capital is at risk. We always recommend investors spread their lending across at least 100 businesses where possible to maximise their returns. You can read more about diversification on our statistics page.

The Funding Circle team

Digging into the data: stress testing the Funding Circle loanbook

Funding Circle launched in 2010, in a post-recession era, and one question we’re frequently asked is what would happen to the loanbook and investor returns, if we encountered further adverse economic conditions in the UK. That’s a good question, and one we’ll aim to answer in this blog by providing results of a recent stress test we carried out.

What do we mean by stress test?

Stress testing has become a crucial part of every bank and financial institution’s risk management strategy since 2008, and for good reason. It is a way of simulating what would happen to a business in an economic downturn.

Last week, the Bank of England published the results of a UK Banking System stress test, where 3 of 8 leading banks were found to be lacking in financial strength. Although we do not work as a bank operates, we are interested in finding out what would happen to the returns of our investors on the marketplace, should we encounter an economic downturn. We feel it is important for marketplace lending to come under the same scrutiny and undergo the same test as the banks did. The scenario we are therefore going to focus on is one which was set out by the Prudential Regulation Authority (PRA) for the 2014 stress test, and is also the most stringent.

What did we do?

Recently we invited an industry leading external consultancy, Hymans Robertson, to undertake an assessment of the loanbook (all Funding Circle loans) and present their findings to us. Hymans Robertson built a stress testing model for us and applied their model to our loans so we could find out how returns would vary, if we saw another downturn in the economy, and witnessed a PRA stressed scenario. In all, 10 industry specific models were built and we followed the exact same methodology that banks and other financial institutions employ to test the Funding Circle loanbook.


The primary component Hymans Robertson used when building their stress model was data surrounding historic insolvencies by sector over a period of 23 years of data (1990 – 2013). This data, available from The Insolvency Service, provides invaluable insights into how every UK sector fared during the 1992 and 2008 recessions. Looking back at both is important as they had different macroeconomic variables, which would have affected sectors differently. For example, high interest rates were a contributing factor to the 1992 recession; they rose to over 14% in 1989, whereas interest rates in 2008 were very low.


Hymans Robertson also conducted an analysis around industry and region concentration levels of our borrowers. The results confirmed that the Funding Circle loanbook is well diversified across UK regions and industry sectors. As their model uses historic country-wide sector data of business insolvencies, it is important  to ensure that our borrowers are representative of the UK. I.e. if we only had financial services borrowing through the marketplace, allocated to the B risk band, all based in London, this would lead to bias in the final results.

The PRA scenario and the results

Hymans Robertson tested several different stressed situations, but we will focus on the PRA scenario. 9 different economic factors were used in the model, including income gearing, the unemployment rate and the average wage. In this scenario changes to GDP, interest rates and inflation over the course of 3 years were as follows:

  • UK GDP drops by 4% (cumulative)
  • Interest rate increase: 0.5% to 4.2%
  • Inflation increase: 1.8% to 6.6% peak

Below we explain in more detail how the assessment worked but at a very simple level: in the most extreme economic conditions which the PRA set, average annualised returns for Funding Circle investors would remain above 5.5%. These results are encouraging.

The results are outlined in the below graphs. Overall, we would expect to see an increase in our annualised bad debt rates from 2.2% to 3.4% at peak on a yearly basis, which would lead to a fall in the overall annualised net return investors would earn, from 6.7% to 5.6%. To put this into context, the expected increase in loss rates represents a c. 50% increase. During the 2007 recession, UK insolvencies increased by 65%.

If you’re lending to businesses through Funding Circle, the peak of bad debt would happen in year 2, where the annualised bad debt rate would increase from 2.5% in year 1, to 3.4% in year 2. It would however, start to fall again in year 3.


The bad debt rates pictured above are reflected in the expected annualised returns graph below. After experiencing an increase in losses, annualised returns would fall to their lowest point in this scenario, to 5.6% in year 2. Once bad debt rates fall again, annualised returns are expected to increase over the remaining years.


Limitations of this scenario

As with all stress testing assessment, it is important to note that past performance is not necessarily a guide to future performance. The nature of modeling for future economic events is that it is an estimate. For example, currently interest rates and inflation are low so stress testing for every institution at this time, is based on a predicted time for when interest rates and inflation rise.


In the most extreme stress case scenario outlined by the PRA, and modeled by Hymans Robertson, the outlook for investor annualised returns remains positive. We would estimate annualised returns to drop from 6.7% to 5.6% across Funding Circle’s portfolio of loans, over a three year stressed period.

We are committed to building a stable marketplace which continues to be representative of the whole small business lending sector in the UK, and we’re confident in the future of investor returns through Funding Circle, and the sustainability of the marketplace through future economic cycles.

You can read more about the performance of Funding Circle loans on our statistics page.


Other macroeconomic points to consider

As well as interest rates, inflation and changes in GDP, income gearing also plays an important role in how small businesses perform.

Income gearing, or in other words, how much income there is available for a business to service debt, is one of the leading indicators of SME (small and medium sized enterprises) insolvencies. SME income gearing is at the lowest level since 1987, which means that the impact of a macroeconomic shock will be lower on small businesses. The graph below shows income gearing for the SME sector in the UK.



Digging into the data: the secondary market

In the second instalment of our data blog series, we take a look at the secondary market data in more detail. The secondary market enables investors to buy and sell their loan parts with each other. This means new investors are able to build up a diversified portfolio very quickly and it also gives investors the ability to access their money early if needed. This blog will take a look at the ability to sell loan parts and the average time it takes to access money.

Accessing your money

In total £77 million has been traded on the secondary market to date, with £2 million traded in October alone. Since we extended the types of loans we offer in April to include small businesses who develop or invest in property, the share of property loan parts listed for sale has also increased. In October 83% of loan parts listed for sale were for business loans and 17% for property. Given that the proportion of property loans is currently 7% of the total outstanding loans, we have split the data out to show access to business loans and property loans separately.


When investors look to sell their loan parts, approximately 50% are listed for sale at a premium. For example, a B loan part earning 9.0% per year might be listed on the secondary market at a premium so the buyer rate is 8.8% earning the seller a margin at sale. However we can see above that listing at par means loans parts are more likely to be sold.

Not only does listing at par affect the likelihood of loan parts being sold, it also helps to speed up the time taken to sell.


What about property?

Turning now to property loan part listings, we can see below that a lower proportion of these have sold over the summer compared to business loan parts. Comparing the lines on both graphs, discounted loan parts actually sell at a relatively similar rate (~70-80%) on both property and business loans, however fewer par and premium property loan part listings go on to be sold.

This difference appears to be primarily driven by the 2% cashback promotion we have been running on property loans. Early investors may remember that we ran a similar promotion when we launched back in 2010. It gives investors an incentive to try a new type of loan, as well as give us some time to learn and refine our processes. Now that we have passed over £23 million lent on property, we will be running this promotion down. We did the same when we reached a similar milestone four years ago.


Liquidity varies on the secondary market

You will have seen in both the business and property loan graphs that there have been variations in liquidity in 2014. This means that at times it has taken more or less time to sell loan parts to other investors. There were two particular events which contributed to lower secondary market liquidity.

The first was between January and March, when the supply of new investor funds was not growing as fast as the demand for loans from businesses. New money therefore predominantly went towards buying primary loan parts as interest rates increased, leading to a fall in liquidity on the secondary market.

The second event following this was the introduction of lending on property loans in April. This meant secondary market liquidity stayed at a similar level. When new types of loans are launched, we expect them to have a temporary impact on the marketplace during a cashback period.

In conclusion

We hope that this blog post has helped to provide some more information and data on how best to sell your loan parts, should you need to access your money quickly. It is important to remember that Funding Circle is a marketplace, so access is dependent on there being a buyer for your loan parts, however the data clearly shows that selling loan parts at par or a discount will ensure a higher proportion are sold quickly. For more information on exactly how the secondary market works, take a look at our FAQs.

The Funding Circle team

Digging into the data – Collections & Recoveries

At Funding Circle we are committed to being a transparent business and we want to share more of our information with you around lending and borrowing activity.

As part of this commitment we are launching a series of monthly blog posts looking at the data behind Funding Circle. The series launches today and this first post examines the decline in late payments by businesses and the increase in the amount of money recovered for investors when they experience a bad debt.

Understanding why bad debts occur

Lending to businesses can deliver attractive returns to investors while helping established British businesses to access the finance they need to grow.

However from time-to-time some businesses will be unable to fully repay their loans. This is often due to an unexpected change in their circumstances; sometimes businesses are themselves the recipient of a late payment from one of their customers, causing cash flow problems. At other times another financial provider, like a bank, may withdraw their support suddenly. Often these are only temporary setbacks for a business, but in some cases it can have a more significant impact, leading to a business failing to repay their loan on time.

When businesses are late repaying their loan at Funding Circle our in-house collections and recoveries team work closely with the business affected to deliver the best possible results for everyone. One of our core principles of collections and recovery is ‘survival for revival’. A business that ceases to trade or is declared bankrupt without any recovery for investors is never a positive outcome.

Since we brought all of our collections and recoveries processes in-house in February 2014, we have seen significant improvements in the recovery rate for investors and a reduction in the number of businesses being late with a monthly payment. What this means to investors is that more businesses are paying back on time and when an instance does occur where a business ceases to trade, we are recovering more money for investors.

Let’s take a look at some of the key numbers:

Bringing down late payments

Firstly the number of businesses that are late with their monthly repayments has dropped since February from ~1.5% to less than 1%. The lowest this has reached is 0.80% was on 31 July 2014.

Decline in % of late payments since launch of FC in-house collections and recoveries teamDecrease in late rate - August 2014

Bringing down the rate of late payments was not achieved by simply defaulting more loans. This short term gain may look good initially, but the overall recovery rate would go down with each new default.

Instead, the decline in late payments is a result of building industry leading policies for managing businesses in distress. These policies involve working closely with borrowers as soon as they experience trouble – which helps to reduce the frequency of late payments, and puts us in a better position should the business ultimately cease to trade.

Raising recoveries for investors

As a result of this work, we expect recoveries across all loans defaulted up to 30 June 2014, to recover a minimum of 34p in the pound. Based on more recent loans (between 1 January 2014 – 30 June 2014) we anticipate the recovery rate to be 40p in the pound.

To give some context to these numbers, independent research indicates that traditional lenders would expect to receive between 28p-42p recovery on a secured business loan once a business enters administration, and 1p-3p. on unsecured business loans (without a personal guarantee).

Increase in recovery rate - August 2014

What is particularly encouraging about these figures is that we believe these estimates could potentially be higher. For example we have not included estimated recoveries on bankruptcies, and any loans currently in dispute before the courts or otherwise in negotiation for a payment plan.

What this means for investors

We are committed at Funding Circle to having the best collections and recoveries process in the industry – ensuring investors feel confident in lending to businesses. We know there is still lots more to do and we are constantly looking to recover as much money as possible, and further improve our communications.

We hope you found this post useful. We’ll be talking about this in more detail on our forum – please join us there. Our next data post will appear in September.

The Funding Circle team