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 1st February 2017, 44% of the value of loans defaulted between 2010 and 2014 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, for example by using Autobid, can also help you earn a stable return.

You can see this from the above chart. It shows the annualised return earned by 95% of investors lending for at least one year, based on the number of businesses they have lent to. The results show that 95% of investors who have lent to at least 100 businesses for at least a year have earned at least 4% per year. In addition, every investor who has followed this strategy has earned a positive return. Data is correct as of 1st December 2016.

Returns are shown after fees and bad debt but before tax. You can read more about the benefits of diversification on our statistics page.

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, for example by using Autobid, 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

The benefits of regular contributions and compound interest increase exponentially over time. The below chart shows the projected account balance for an investor who lends £10,000 during March 2017, in addition to creating a standing order for £100 per month. Returns are at our estimated annualised return of 6.9%* (as of 6th March 2017), are compounded monthly, and are after fees and bad debt but before tax.

“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 and by lending to businesses your capital is at risk.

Conclusion

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

*This estimated return is a weighted estimate of the annual return after fees and bad debts that investors could earn from lending money to businesses seeking loans as of 6th March 2017. It is calculated by taking the gross interest rate less fees and estimated bad debts that will occur in the future for each of the last 3000 loans accepted on the marketplace. The average return is weighted by loan amount, compounded and before tax. The return is updated daily. See the full calculation here.

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.

Methodology

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.

Insolvency

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.

Amortisation

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.

HPI

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:

results

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.

Remember

 

Conclusion

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.

Your lending has boosted the UK economy by £2.7 billion

Since Funding Circle launched six years ago, investors including individuals, the government-backed British Business Bank, and a range of financial institutions have helped more than 15,000 UK small businesses access finance. Your lending has helped to create jobs, build homes and support regions that have faced economic hardship in the wake of the last financial crisis.

This was the conclusion of independent research published today by the Centre for Economics and Business Research (CEBR). The report reveals that your lending has supported the creation of 40,000 new jobs, whilst boosting the UK economy by an estimated £2.7 billion since 2010.

You can download the full report here, view our infographic, and read more about the key findings below.

Small business, big impact

Since 2010, your lending has supported the creation of approximately 40,000 jobs across the country. Not only do the businesses you lend to benefit, but companies along those businesses’ supply chains do too. The jobs you help to create also increase spending power in that area, making a further contribution to the economy. CEBR estimates that the total economic activity generated by investors lending through Funding Circle has added £2.7 billion to the UK economy1 over the past six years.

Over three fifths (61%) of borrowers surveyed as part of the report saw their revenue increase as a result of taking a loan with Funding Circle, while nearly half (47%) reported a rise in profits.

Why do borrowers choose Funding Circle?

The report finds that loans facilitated by direct lending platforms like Funding Circle now make up 6% of all new small business loans granted by platforms and the main high street banks.2

Creditworthy businesses are attracted to Funding Circle by the speed and simplicity of the application process. Nearly three quarters (72%) of borrowers found the experience of obtaining a loan with Funding Circle faster than other providers they considered. This helps to explain why 77% initially shopped around for finance, but 94% would come back to Funding Circle first in future.

eirgraph1

 

Your lending is also helping a fifth more creditworthy businesses to access finance than before, where they have previously been underserved by traditional sources of finance. 21% of businesses surveyed believe they wouldn’t have been able to access finance without Funding Circle. CEBR considers this to be due to restrictions in the wider lending environment, with many banks having exposure limits on the amount they can lend to a particular region or sector for example. These businesses are creditworthy – Funding Circle has a robust assessment process which uses a balanced set of risk tools to create a full picture of the borrower’s financial health. You can read more about how we assess loans here.

Supporting businesses in the North

Funding Circle loans are also popular among businesses in parts of the UK that have faced greater economic challenges, such as the North. The North East has the country’s second lowest Gross Value Added, which is a an indicator of economic performance and measures the value of goods and services produced in an area.

Partially due to this economic underperformance, businesses in the North East make up just 3% of all businesses in the country. However, 10% of your lending goes to businesses in the North East helping to balance economic growth across the country.

Unleashing the potential of small housebuilders

CEBR estimates that the UK currently faces a cumulative shortfall of 264,000 homes, with large developers unable to bridge this gap on their own.

eirgraph2

Small developers, like those you lend to through Funding Circle, have continued to struggle to access finance through traditional channels since 2008. Since extending the loans we offer to include property finance, we have been able to better-serve these small developers. CEBR estimates that since 2014, your lending has helped to build approximately 2,200 homes across the country, providing a potential solution to the UK housing crisis.

Conclusion

The research published today by the CEBR highlights the role Funding Circle investors have played in supporting economic growth in the UK. Small business isn’t small – it accounts for half of the UK’s GDP3 and 60% of private sector employment4. Their success, and your lending, is vital to our economy.

We hope you found this piece useful, and if you have any questions please join the conversation over on our forum or get in touch.

Enjoy lending,

The Funding Circle team

1 The CEBR estimates that the direct, indirect and induced GVA impact of Funding Circle loans is £2.7 billion. GVA, or gross value added, measures the economic contribution made by a particular economic unit such as a region, business or industry. It is used as one of the factors when calculating gross domestic product (GDP) and is a measure of the relative economic importance of a business.

2 Direct loans accounted for 6% of all new loans granted by the main high street banks and direct lending platforms to small and medium sized businesses in the last quarter of 2015 – up from 3% for the same period in 2014 – according to data from the British Bankers Association and the Peer-to-Peer Finance Association.

3 Source: http://researchbriefings.files.parliament.uk/documents/SN06078/SN06078.pdf

4 Source: http://www.fsb.org.uk/media-centre/small-business-statistics

 

Improvements to the way loans are listed

At Funding Circle, our aim is for investors to earn attractive returns by lending to established businesses in a quick and simple way. As part of this commitment, we have introduced a new way for businesses to accept their loan contract before their loan is listed on the marketplace.

This has two main benefits for investors:

1) Your funds earn interest as soon as the loan is 100% funded: Previously, once a loan received 100% of its required funding, the borrower would have up to five working days to accept or reject the loan. However this meant your funds were tied up during this period and not earning interest.

2) More businesses accepting loans: Previously approximately 15% of businesses would reject their loans once fully funded. By accepting their loan contract before they are listed on the marketplace, this means that when you place a bid you can have confidence that once the loan is funded it will close automatically, and your funds will not be held in loans that can be rejected by the business owner.  

As a loan reaches 100% of its required funding, it will now automatically complete and you will no longer see it listed on the loan request page. On occasions it may appear that there are fewer loan requests for you to bid on, particularly on a Monday morning or after a bank holiday weekend. However plenty of lending opportunities will be made available for you every week. You can find recent marketplace data in our weekly lending review, found on our blog.

This new improvement follows on from the introduction of fixed rate loans in October last year and we are pleased to make it available to investors after many months of work. We hope you have found this post useful, and if you any questions then please get in touch or join the conversation on the forum.

Enjoy lending,

The Funding Circle team

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.

Conclusion

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.

Collections charges for borrowers more than 90 days late

Today we are making some changes to our terms and conditions which cover charges for late paying businesses. Before placing your next bid, you’ll be asked to re-accept these terms. Further details are outlined below.

At Funding Circle, we have a robust credit assessment process in place to ensure that only creditworthy borrowers are listed on the marketplace. However, from time-to-time some businesses are unable to fully repay their loans, this is called bad debt.

When this happens our in-house Collections and Recoveries team work on investors’ behalf to help the borrower start repaying, or to recover funds by defaulting the loan and commencing recovery proceedings.

Bad debt is part of any form of lending, which is why we recommend investors diversify their lending across at least 100 businesses equally.  As of June 2016, the bad debt rate across the platform was 1.6%, while our estimated bad debt rate was 1.8%. You can see our current marketplace performance on the statistics page.

We believe that we  can deliver the best result for our investors when we carry out many of the tasks involved with the recoveries process directly, rather than outsourcing to a debt collection agency. Since we took our Collections and Recoveries team in-house in February 2014, the actual recovery rate on defaulted loans has risen from 14p/£ to 21p/£ in May 2016, and our estimated recovery rate has risen to more than 40p/£ over a five year period.

To cover the increasing costs incurred by the recoveries process, we are introducing a collections charge for some borrowers who are unable to clear their arrears.

How will the charges work?

Loans that are defaulted, or are more than 90 days late may be charged a collections charge, capped at 15% of the outstanding loan amount owed by the borrower. This will apply to loans originated on or after 6th June 2016. The collections charge is payable by the borrower, will not be deducted from what is owed to investors and will apply to all our loans, including property loans.

When a recovery payment is received from the guarantor or borrower, up to 20% of that payment will be allocated towards the collections charge. In situations where external legal costs may be involved, this figure may be higher, but will never exceed 40% of each recovery payment. As the charges are not deducted from what is owed to investors we estimate that the average repayment plan will take 10-15% longer to complete when the charge is applied.

The table below sets out the maximum amount charged to borrowers, based on the outstanding loan amount at the time of default.

collections charges

The recovery charge will be collected in addition to the amount owed to investors. Approximately 80% of all our recoveries are from guarantors who pay the debt in full (plus interest). For the remaining cases, we will stop collecting the collections charge if it becomes certain that a full recovery will not be made, for example if the guarantor terminates a payment plan and enters an IVA or bankruptcy.  In these cases there will not be a rebate of any collections charges that have been deducted. We will also not apply any collections charge if the loan is repaid in full within four months of the default date.

Why are we doing this?

We are committed to achieving market-leading results for investors and we believe that this charge will help us to do this by covering the costs incurred in the recoveries process, whilst also ensuring we are fair on our borrower community. By keeping our team in-house, we look to make as full a recovery as possible on every loan, therefore investors receive better results than if we were to outsource the recoveries process to a third party.

Updates to the Terms and Conditions

We have made some changes to our T&Cs (specifically clauses 8 and 12), clarifying when fees will be charged to borrowers. Our loan conditions have also been updated which means you’ll need to re-accept them before placing a bid, or, buying a loan part. Please view our updated terms and conditions, or contact a member of our team if you have any questions.

If you have any questions, please don’t hesitate to get in touch.

Enjoy lending,

The Funding Circle team.

Update on the Funding Circle ISA

Following our last update in April, we wanted to keep you up to date on our progress towards launching the Funding Circle ISA.

As you may know, in order to launch an Innovative Finance ISA, all peer-to-peer lending platforms are required to be fully authorised by the Financial Conduct Authority (FCA). We have been operating under interim permission since April 2014, and we continue to work closely with the FCA. Although significant progress has been made, it is important that the FCA completes this process in a thorough manner.

Therefore, we do not yet have a date for when the Funding Circle ISA will be available, however as soon as we do, we will let you all know.

Other ways to earn tax-efficient returns

In the meantime, if you are looking for tax-efficient returns you could consider the following:

  • The current tax year ends on 5 April 2017, so there is still plenty of time to take advantage before the subscription deadline. You can also open a Cash or Stocks & Shares ISA elsewhere and transfer it over to the Funding Circle ISA when it becomes available.
  • If you are based in the UK, you can earn tax-free returns by holding shares in the Funding Circle SME Income Fund through either a Stocks & Shares ISA or Self-Invested Personal Pension. Speak to your financial adviser for more information.
  • Thanks to the new Personal Savings Allowance introduced by the Chancellor last year, the first £1,000 of interest earned for basic rate taxpayers and the first £500 of interest for higher rate taxpayers is now free of income tax. The Personal Savings Allowance is not available for additional rate taxpayers. This applies to interest earned through Funding Circle as well as through other traditional savings accounts. More information, including a link to the full guidance from HMRC, can be found in our F.A.Q
  • If you are lending as an individual, a new bad debt relief is also available through peer-to-peer lending platforms for loans that have become irrecoverable. The tax statement available to you has been updated to reflect these changes, and more information can be found in our F.A.Q.

Remember, by lending through Funding Circle or investing in the Funding Circle SME Income Fund your capital is at risk.

We hope this update has been useful, however if you have any further questions please feel free to contact us and we’ll be happy to help

Enjoy lending,

The Funding Circle team

 

*This blog post is provided for information purposes only and is not intended to be construed as an offer, invitation or inducement to engage in investment activity in relation to – or a financial promotion of – Funding Circle SME Income Fund. Funding Circle does not give investment advice or recommendations and this blog post should not be relied upon as such*

The Funding Circle SME Income Fund

Last week we gave an update on the upcoming Funding Circle ISA, and explained that it is possible for investors to earn tax-free returns by investing in the Funding Circle SME Income Fund. In this piece we will look at the Funding Circle SME Income Fund in more detail, and how investors could consider including it as part of their diversified investment portfolio.

Before we go on, it is important to highlight that the Fund operates differently to investing directly on the marketplace, and any investors interested in investing in the Funding Circle SME Income Fund should first speak to a financial advisor.

What is the Funding Circle SME Income Fund?

The Funding Circle SME Income Fund is listed on the London Stock Exchange. Last November it raised £150 million from a range of investors – including asset managers, wealth managers and pension funds. Shares in the Funding Circle SME Income Fund may also be purchased by individual retail investors in the UK.

How does it work?

The Funding Circle SME Income Fund provides access to a diversified portfolio of loans originated through Funding Circle’s global geographies in the UK, USA, Germany, Spain and the Netherlands.

Rather than lending directly to businesses on the Funding Circle platform, investors purchase shares in the Fund itself, receiving income in the form of quarterly dividends. The target Net Asset Value total return is 8-9% per annum, and the annual target dividend yield is 6-7 pence per share. Your actual return may be higher or lower since, like any investment in shares, your capital is at risk.

The Funding Circle SME Income Fund buys up to 35% of loans originated through the Funding Circle marketplace. Like other larger investors, it only buys whole loans and does not compete directly with individual investors, who purchase partial loans. The allocation between whole loans and partial loans remains completely random.

Including the Funding Circle SME Income Fund within your investment portfolio

For many investors, peer-to-peer lending will make up part of a diversified portfolio, with investments often spread across multiple asset classes such as equities, cash, stocks and fixed income products.

The Funding Circle SME Income Fund is an equity investment, so investors’ total return is made up of dividends received, plus appreciation (if any) in the share price of the Fund. Share prices can be subject to volatility over the short term, so the Fund can be considered a longer term investment. For individual investors, this could form part of a Self Invested Personal Pension, (SIPP).  A SIPP works like a personal pension, however investors have full control and make investment decisions on their own behalf. All earnings from investments held within a SIPP are tax-free. Investors can also include their investments in the Fund within a Stocks and Shares ISA.

How can I buy shares in the Funding Circle SME Income Fund?

The Funding Circle SME Income Fund operates as an independent company and investors are unable to buy shares directly from Funding Circle. Investors interested in purchasing shares may want to consider speaking with their financial advisor. For further information on the Funding Circle SME Income Fund, please visit its website: www.fcincomefund.com

We hope this post has been helpful. Over the next few weeks we will be discussing the benefits of tax free investing in more detail.

If you have any questions, please feel free to join the conversation on the forum.

The Funding Circle Team

*This blog post is provided for information purposes only and is not intended to be construed as an offer, invitation or inducement to engage in investment activity in relation to – or a financial promotion of – Funding Circle SME Income Fund. Funding Circle does not give investment advice or recommendations and this blog post should not be relied upon as such*

 

We’ve hit £1 billion!

And you’ve helped us reach this milestone. Thank you!

header 1b

The Funding Circle marketplace has reached a major milestone: lending £1 billion directly to small businesses in the UK.

More than half of this money was lent through the marketplace in 2015 alone, and you and other investors are on track to lend a further billion pounds within the next 12 months.

Lending directly to businesses on the marketplace means businesses can access finance which is fast, fair and fundamentally more efficient than alternatives. 

Reaching £1 billion is a fantastic achievement and this lending has resulted in an estimated 46,000 new jobs*. This is testament to the significant impact you and other investors at Funding Circle are having on UK economic growth.

Click here for more details about what £1 billion means. 

1 billion image

 

 

The Funding Circle team.

 

Independent research by government think tank, Nesta, found that an average business borrowing through Funding Circle employs ~10 people and increases headcount by ~30% within 12 months of taking a loan. Nesta, Banking on Each Other, 2013.

Highlights from 2015 – and what a year it’s been

As 2015 draws to a close, we look back at some of our highlights from the past 12 months. And what a year it’s been!

More than £500m lent in 2015

In January 2015 the marketplace passed £500 million lent to small businesses across the UK, and now we’re fast approaching the £1 billion milestone. This achievement would not have been possible without our investor and borrower communities, so we’d like to say a big thank you to all for your continued support!

Growing the UK marketplace

Our investor community has grown significantly with 45,275 investors now lending to businesses, including 19 local councils, financial organisations, Huddersfield University and the UK Government.

7,250 British businesses have borrowed through the marketplace in this year alone, bringing the total number of business loans to more than 15,000. We’ve been lucky enough to visit some of these borrowers to find out how your money has helped their businesses succeed. You can read their stories on the blog.

Launching in Europe

In October, we launched across Europe to help even more small businesses access finance, so we teamed up with our colleagues in the US, Germany, Spain and the Netherlands to put together a short video of our highlights.

You’ll meet members of the Funding Circle team in all geographies, hear from some of our favourite borrowers from the year and get a sense of how you’re helping the wider economy. 

2015 highlights video

We hope you all enjoy a break over the holiday period, with best wishes for the year ahead.
The Funding Circle team

The new mobile app is coming!

We’ve been busy working on a new version of the investor mobile app for iOS 9 which we’re submitting to the app store in just a few weeks. Before it’s available for you to download, here’s a rundown of the things you need to know.

Why iOS?

As some of you may know, we launched a Funding Circle app for iOS in December 2013. iOS was the largest user group of the website, and this trend has continued. In October 2015, 25% of website traffic came through mobile, with 64% of this traffic coming from iOS devices compared to 31% from Android.

What’s new?

The code in the current (and soon to be old) version of the app made it difficult to build new features, so the team have re-built the app entirely. This will make it easier and faster for us to add new features going forward which the team plan to do on a regular basis.

For the first release, the functionality of the new app has not changed much from the current version, but you will notice:

app image

– a fresh, new design for the new larger screen resolutions

– improved user experience

– Touch ID and passcode enabled to make it easier to login

– updates for fixed rate changes to the marketplace

Who’s behind the app?

We now have a dedicated in-house mobile team: Rory, Edu, Emma and Dallas. We asked them a few questions about the new app:

Questions  for the team:

1) What’s your favourite thing about the new app?

Emma: I love the folding headers, where the images blur as you scroll up the screen.

Edu: I really like the way data has been exposed through the new version of the app. For example, on the summary page, it is great to be able to see how my funds are distributed across the three different stages: available, temporarily held on bids, or lent to a business.

Dallas: Knowing that there is a well-engineered structure inside which is based on solid architectural principles. Having the lower layers of the app made correctly helps all the animations built on top perform much better, and will be easier to maintain into the future.

Ben: The little things that have a story behind why they were chosen – like the effort the team spent debating and researching whether there should be five or six numbers in the passcode, or the way the business information cell has a set height that entices you to read on.

2) What was the most difficult part of the project?

Emma: Adding transparency to the bottom navigation bar was tough. It’s actually one of Apple’s default settings, but the other styling we added changed the default behaviour and we had to change multiple views to bring it back.

Edu: I think the most difficult part was planning at the start of the project. We sat in a room with white paper in front of us in order to define what could be improved and how we were going to do it. We started thinking of the different reasons someone would open the Funding Circle app, what they would be looking for, and how we were solving it on the first version of the app. There were several iterations of design and user testings which allowed us to progress from a user flow on paper to the final design and implementation. This has been a huge effort across several teams, and I truly believe it was worth it in order to offer the best experience possible to our users.

Dallas: Ensuring that we are focussing on developing the right features for the user, based on real evidence and user testing.

Rory: Having fixed rates on the marketplace is changing the behaviour of our users. Keeping up to date with what our investors want can be difficult. We will be keeping a close eye on how users interact with the new app and will work hard to roll out the new features you want much more regularly than we have done before.

Ben: I agree with Rory.  The most difficult part will be deciding what new features we should add next.

3) What would you like to develop in the next iterations?

Emma: I’d like to see us implementing autobid settings or a secondary market feature, as I feel that these are becoming more important parts of the investor experience.

Edu: We are going to continue to be really proactive in listening to feedback from our users and making changes according to their needs. There are other features that I would like to see introduced. For example, being able to subscribe to notifications whenever a loan request matching certain criteria is listed; bringing the secondary market into the app; and probably the most immediate one, updating the iPad app to the new version.

Dallas: Implement some of the new features Apple have included in iOS such as 3D touch for extra user actions, spotlight search, Apple watch app and/or contextual notifications. These would be features that would be interesting to work on but we would first need user testing/validation to ensure our users would actually find them useful.

Rory: iPad – so we can expand and iterate on top of our existing component library. Doing so will allow us in the future to roll out new features across the two platforms simultaneously.

Ben:  I’m really looking forward to finding new ways to provide the most important information for customers at the right time – maybe something that tells you what has changed in your account since you last looked at the app.

 

Stay tuned on the blog to find out when the new app will be released!

The Funding Circle team

Summary from our September investor evening

On Thursday 17th September we welcomed 60 investors to our office in London, to talk about the decision to move to fixed interest rates for new loans. We filmed the whole event, so those unable to attend could hear what was discussed.

Since announcing our intention to make this change we’ve received a great deal of feedback, so thank you to all of you for taking the time to give us your thoughts. We have answered some of your key questions on the blog, and used these questions as the focus for the evening.

We’ve put together a 5 minute highlight videos below of the key points discussed. You’ll hear from co-founders Samir Desai, James Meekings and Andrew Mullinger, and from Tom Eilon who works on special projects.

You can watch the whole event in the video below. The team answered questions throughout the evening rather than having a Q&A section at the end and the key points have been noted below. Unfortunately the sound was not good during the first 5 minutes, but levels out after. The whole filmed event lasted for appox. 2 hours.

Key moments can be found at the following times:

0 – 0.05 hours Introduction

0:05 – 0.12 hours Why we’re moving from an auction model

0:12 – 0.22 hours Answers to some of the most popular questions we’ve received.

These include, “How is Funding Circle different to a bank?”, “How will the rates be set?”, “How can you manage loans filling quickly?” and “ What about secondary market liquidity?”

0:22 – 0:25 How are rates set and what returns can investors expect?

0:37 – 0:40 Diversification

0:40 Lending to small businesses in the US

0:46 and 0:58 – 1:00 Autobid

0:49 – 0:57 What will happen to the Q&A with borrowers?

1:00 – 1:04 How are we attracting more businesses to Funding Circle?

1:04 – 1.15 Risk management and loan performance

1.26 – 1.29 Looking ahead

We will post a roundup of our first week with fixed interest rates in the coming days, and hope you enjoy the video. 

If you have any questions about fixed interest rates, please get in touch and we’ll be happy to help or you can join us on the forum.

The Funding Circle team

We’re upgrading Autobid: here’s what you need to know

On Monday, 28th September we plan to release an upgraded Autobid. If you’re already using Autobid there’s nothing you need to do as it will continue lending for you. We’re just making some adjustments so it works with fixed interest rate loans.

How will Autobid work?

Autobid will bid at interest rates set by Funding Circle for all new loans listed on the marketplace. These rates are based on a number of factors including the risk band and term of the loan. Please see below for the gross interest rates which will take effect from Monday, 28th September. Your actual return may be higher or lower as your capital is at risk.

Fixed rate card

By using the advanced settings you can choose the risk bands you want to lend to and the interest rates you want to buy loan parts at on the secondary market.

What’s new?

Following investor feedback we’ve received, we are reducing the maximum amount you can lend to each business from 0.5% of your total portfolio, to 0.25%. This means Autobid can spread your money across even more businesses than ever before, so your investment should be more diversified.  

From Monday, you’ll be able to change this setting. Here’s what it will look like:

diversification

Using advanced settings?

With the new advanced settings shown below, you can choose the risk bands you want to lend to, ranging from A+ to E, view the estimated bad debt rates for each risk band, and choose your offer rate for buying loan parts on the secondary market.

autobid2

Quick tip: You’ll need to turn Autobid off to update your settings.

What does it mean for you?

If you’re using Autobid:

There’s nothing you need to do, as Autobid will continue lending for you. It will place bids on new loans and buy loan parts from other investors.

If you’re new to Autobid, follow these simple steps to turn it on:

1. Navigate to Autobid in your account

2. Select the maximum you want to lend to one business, as a percentage of your total funds. The lower you set this, the more diversified you will be which becomes important when a business is unable to repay their loan.

3. Click ‘Turn Autobid on’

If you only want to lend to certain risk bands, you can do this in the advanced settings:

1. Click Advanced settings

2. Check the risk bands you want to include

3. You can adjust your secondary offer rate here too, and view the estimated return after fees and bad debts

4. Click ‘Turn Autobid on’

If you have any questions about this, please get in touch with our customer relations team.

The Funding Circle team

Happy 5th birthday, Funding Circle!

In August 2010, the Funding Circle marketplace was launched by 3 university friends, Samir Desai, James Meekings and Andrew Mullinger. £50,000 was lent to small businesses in the UK during the first month.

Fast forward 5 years, and approximately £65 million, or $100 million, is being lent to small businesses in the UK and the US every month. We’ve come a long way in the past 5 years and it’s all thanks to your lending and continued support, so here are some highlights:

– More than $1 billion has been lent to small businesses in the UK and US.

42,000 investors, including individuals, the Government-backed British Business Bank, a university, 16 local councils and a number of larger financial organisations are lending to small businesses.

– Your lending has resulted in 12,000 loans to more than 10,000 UK businesses.

– 12,000 loans has created an estimated 36,000 jobs in the UK*.

– Borrowers have gone on to do fantastic things including exporting worldwide, like Moo Free, some have had their goods stocked in major department stores, like Pampeano, and one business, The Stripes Company, has had their fabric feature on the set of a major TV series, Downton Abbey.   

– More than £54 million of interest has been earned by investors in both the UK and US

The growth of Funding Circle community would not have been possible without your continued support, so we’d like to thank all of our investors and borrowers for helping to build the Funding Circle marketplace into what it is today.

The Funding Circle team


Click the image for the full version

fc-timeline-front

* Independent research by government think tank Nesta found that businesses that receive a loan through Funding Circle employ on average 11 people, and see an average increase in employment of 27 per cent after receiving finance.

We’re introducing a new risk band and renaming C-

We’re excited to announce that we’re introducing a sixth risk band, to help more small businesses access finance, whilst offering investors more borrowers to lend to. These loans will be listed on the marketplace over the coming weeks. Here’s what you need to know:

1. Introducing E

The new risk band will be called E and will offer an attractive risk-return profile for investors. The gross interest rates you can bid at for loans in the E risk band will be between 18.2% and 20%, to reflect a higher expected annualised bad debt rate of 8%.

If you’re using Autobid you will need to update your settings to include E, as Autobid will not lend to E loans automatically. We’ll notify you by email when the new risk band has launched so you can do this.

risk band

2. Renaming C- to D in the coming weeks

To make our risk grading simpler, we are going to rename C- to D. Over the next few weeks, all loan parts you hold which were C-, will be renamed to D. This will be reflected in your summary page, and we’ll confirm once the change has been made.

Our risk bands will be:

A+, A, B, C, D, E  where A+ is lowest risk.

This does not mean that C- loans have been re-assessed or have higher expected bad debt rates than they did before. We’re simply changing the name to make the risk grading easier to understand.

3.  The evolution of risk bands at Funding Circle

In 2010 we started with 3 risk bands: A+, A and B. We launched C in September 2011, and D (formerly C-) came in July 2013.

Adding our sixth risk band, E, is a natural step. We have been tracking the performance of all businesses who have come to Funding Circle, including those whose applications were declined, for more than 2 years so we can estimate the risk of these businesses.

4. Estimated returns for all risk bands

For each risk band, the table below shows:

  • the minimum bid rates for each risk band;
  • the estimated annual bad debt rates;
  • the estimated returns (based on minimum rates) after fees and bad debt, but before tax.

Actual returns may be higher or lower and your capital is at risk.

Risk table

5. Higher interest rates to reflect greater level of risk

The minimum bid rate of 18.2% for E loans has been set based on a range of factors including the risk and volatility associated with lending to these borrowers, macroeconomic factors and competition in the market. Estimated returns are therefore higher on E loans, and this is to reflect higher estimated bad debt rates and greater volatility.

It’s worth remembering that estimated bad debt rates are no guarantee of the actual bad debt you will experience for each risk band, so we would recommend spreading your lending across lots of borrowers in different risk bands to reduce the impact of any single bad debt. You can read more about how to do this in our blog about diversification.

6. Helping small, creditworthy businesses

We will still only allow creditworthy businesses to borrow through the marketplace, and every loan application will be assessed by our experienced credit assessment team.

Businesses who have loans in the E band may generally have lower profit after tax than other risk bands – not because they have poor payment performance.

A Delphi score (from Experian, a third party bureau measure of business risk) is one of the many factors which are considered when we assess a loan application. We expect E band loans to have an average of 62/100, which is higher than the UK average of 45 for small businesses.

delphi score

How can you lend to these businesses?

You will see the first E loans listed on the marketplace over the next couple of weeks, and you can place your bids as you would normally. The highest gross interest rate you can bid at will be increased to 20%.

Do you use Autobid?

If you’re an Autobid user you will need to update your settings as your Autobid will not automatically include E loans. When E loans launch, turn your Autobid off, tick the box beside E to include these loans, and turn it on again. Remember by lending to businesses your capital is at risk.

Join us on the forum where we’re discussing this news. If you have any questions at all, please contact us and our team will be happy to help.

Enjoy lending,

The Funding Circle team

How our collections process works (part 2)

Loan Comments

When a business falls behind with their repayments, we have a process in place to try to get them back on track which we outlined in our previous post. We will now explain how and when we update you on loans which are late, and those that have defaulted. We do this by writing loan comments which you can access in your account.

Firstly, we hope you have noticed an increase in frequency and detail in loan comments recently.

At the beginning of each fortnight, the Collections & Recoveries team takes a snapshot of all the loans and all the Defaults. We distribute these around the team so that we can check whether there has been any material activity which should be explained to you.

This means that that the longest a defaulted or late loan should be without a comment (unless we have specified a date for the next comment) will be 4 weeks. In practice, however, this will usually be around 2 weeks.

Downgraded Loans

We carry out a monthly review of all downgraded loans to see whether they should have their risk band reinstated. If we reinstate a risk band we will provide a comment to explain why we have done so.

Late Loans

If a borrower misses a payment at the beginning of one of those two week periods and we do not cure it within that period, then the loan will be given a comment the following fortnight.  We will endeavour to explain the reason that we think a loan has become late as we appreciate that it is helpful for investors who wish to buy and sell loan parts from others.

Negotiations

When a borrower enters liquidation or administration it often takes a couple of months for the guarantors to sort out their financial affairs and work out a plan for the future.  We try to work with guarantors throughout this period, but communication is often irregular and the initial forecasts can be disappointing.  That said, things often pick up, and because of our approach, guarantors either try to enter into payment plans that result in a full recovery or they seek relief through bankruptcy.

Payment plans

When a borrower or guarantor is in a payment plan and is making regular monthly payments, we will only comment when the payment comes in.  From time to time payments may slip by a few days, but we are monitoring them and will update you if we feel that there is a material risk of there being no payment or a reduced payment in that month.

Legal or insolvency proceedings

When a guarantor enters into a formal insolvency procedure (such as an individual voluntary arrangement or bankruptcy) we will try to find out what the estimated recovery is, but insolvency practitioners are often unwilling to give information outside of the prescribed reports.  These reports occur every 6 or 12 months, and there is no available information outside of that.  Likewise, court procedures can take a long time to work through, especially if the defendant is putting up a defence.  We will, where possible in these longer term cases, give you a specific date for when we will next post a comment, with a reason why that should be the next date.  Of course, if anything significant occurs before then we will let you know.

We hope this 2-part series by our collections team has been helpful in understanding more about how our collections and recoveries process works. If you have any feedback on how we could further improve loan comments, please let us know.

Read more about our RAG status for Loan Comments, or join us on the forum if you’d like to discuss this in more detail.

The Funding Circle team

 

How our collections process works (part 1)

Lending to businesses can deliver attractive returns to investors while helping established British businesses to access the finance they need to grow. As part of lending to businesses, some will be unable to fully repay their loans, which is why we believe diversification is so important.

When a business falls behind with their repayments, we have a process in place to try to get them back on track. We have spent some time with our Collections and Recoveries team to find out more about how they do this, and wanted to share this with you.

In this post and the next, we explain in detail how our collections and comments process works, which we hope you will find useful.

THE COLLECTIONS & RECOVERIES PROCESS

(i)                 Late Payment

We typically find out if a direct debit has failed 3 days before the payment date.  At this point we automatically send an email to the borrower, and we try to retake the direct debit.  We will also  phone the borrower to ensure that the relevant account is in funds.

We will be informed of the second direct debit failing within 4 business days of taking it.  Such failure results in us sending a formal demand letter to the borrower and the guarantors.

We then spend the next 6 days phoning and emailing the borrower and the guarantors to arrange a manual payment to clear the arrears.

Unless we are arranging a payment plan, if the loan is still late 7 days after the payment date we will charge an administration fee of 15% of the arrears, and send another demand letter.  The purpose of the fee is to encourage borrowers to get the loan back to fully performing, and not to prioritise other creditors over their debt to Funding Circle investors. The fee, if received, goes towards our irrecoverable third party costs for recovery action which we start.

We will continue to contact the borrower and guarantor through phone calls and emails.

It is important to note that behind the scenes we work hard to contact borrowers and guarantors. We use a variety of techniques including tracing other phone numbers and addresses, and checking other business interests. We believe that it is in both our interests to resolve each late payment or defaulted loan as quickly as possible and have money repaid to you.

Depending on the circumstances, if we have had no contact from the borrower or the guarantors for at least 17 days we may then decide to Default the loan.

(ii)               Defaulted loans

When the loan is defaulted we demand full payment of the full outstanding liability from the borrower and the guarantors.  This has the effect of crystallising the debt of the guarantors, and enables us to commence legal action (or formal insolvency action) against them.

Most of our recoveries are through the guarantors, and so our enforcement action will end up in one of the four ways set out below.

1. Payment plans

We will always seek to agree a fair and affordable payment plan with borrowers and guarantors.  We want guarantors to get back on their feet and repay the loan in full over time, and usually we will not agree to an early settlement figure for less than 100p in the £.  We always ask for contractual interest to be paid too. This strategy appears to be quite successful although it can be frustrating for investors initially as often payments are small at the start of a payment plan, and take several months until they increase.  If the payments are below a certain threshold, we will require security on the guarantor’s property.

2. Individual voluntary arrangements

We do not accept informal settlements and will only allow the debt to be reduced if the guarantor enters into an Individual Voluntary Arrangement (IVA).  The reason for this is that an insolvency practitioner, who is an officer of the court, is standing behind the IVA and is responsible for ensuring that the proposal is fair and accurate.  This is not the case in an informal arrangement. Also, an IVA is designed to give people another chance, and we need to respect the legal purpose behind this procedure.

3. Bankruptcy

Sometimes bankruptcy can be the right option for an individual.  When a guarantor is made bankrupt, we will always try to get an insolvency practitioner from our panel appointed as Trustee in Bankruptcy (i.e. the person who takes controls of the bankrupt’s assets and carries out various investigations).  However, sometimes this is not possible.  When an individual enters bankruptcy it is very rare that there will be a material recovery for investors.

4. Court Action

Sometimes court action may result in us appointing High Court Enforcement Officers (i.e. bailiffs) to agree a payment plan with a guarantor, or we seek to obtain a charge on their property and then an Order for Sale. This is very much the last resort for us.

We will always stop any legal action in its tracks if the guarantor starts communicating with us again. That said, if we have any reason to believe that a guarantor is deliberately trying to deceive us (rather than simply being afraid to face up to his or her responsibilities), we will always take legal action or commence bankruptcy proceedings rather than try to negotiate or approve an IVA.

What’s next?

We hope this has been helpful in understanding more how the collections process works. Stay tuned for the next installment where we’ll run through how we update you: loan comments.

What does diversification at Funding Circle mean?

Our aim at Funding Circle is to help you have the most enjoyable experience possible, by earning attractive returns in a sustainable way.

In this short video we run through the basics of diversification, why we believe it’s so important and how you can diversify at Funding Circle.

How many businesses are you lending to?

If you’re lending to less than 100 businesses you may be missing out on a more stable return.

Log back into your account today to see how many loans you hold. Could you increase this number over the coming months? Remember, by lending to businesses your capital is at risk.

Want to know more?

You can visit our statistics page for further details on the benefits of lending to at least 100 businesses.

As of 1st January 2016, approximately 94% of investors who have lent to 100 businesses equally are earning more than 5% per year (after fees and bad debt, but before tax). This is based on investors who have been lending for at least 1 year and have been at the stated level of diversification for at least 75% of the days they have been lending for. Remember, past returns are not necessarily a guide to future returns.

We update these numbers regularly so you can compare your account against others and find out how much other investors are earning by level of diversification.

We’re on-hand to help if you have any questions about your account or how you can diversify. Simply call us, or send us an email.

The Funding Circle team

 

Transcript

Our aim at Funding Circle is to help you have the most enjoyable experience possible, by earning attractive returns in a sustainable way.

In this video we’re going to talk about diversification, which simply means lending small amounts of money to lots of different businesses.

It’s really easy to diversify at Funding Circle as we have thousands of loans at your fingertips. Lend to businesses like David’s manufacturing company in Durham and Celia’s farm in Somerset.

Investors who lend small amounts to many different businesses, help a lot more small businesses access the finance they need to grow, and also earn a return which is much more stable.

Here’s an example of how diversification at Funding Circle works. You have £2,000 and lend £20 to 100 businesses. If some businesses are unable to pay back their loan, it won’t affect your overall return too much.

Statistically, every investor who has lent to at least 100 businesses equally has earned a positive return. In fact, 90% of investors who have followed these 2 simple guidelines are earning more than 5% per year.

-Lend to 100+ businesses

-Lend 1% of your total to each one

However, if you take the same £2,000 and lend £500 to 4 businesses, if one of those businesses is unable to repay then your overall return will drop significantly.

By spreading your money and helping hundreds of British businesses, you can see your money, and the UK economy grow.

Remember, by lending to businesses your capital is at risk.

 

Talking Tax

Included in the Budget last week were a number of new announcements relating to lending through Funding Circle. Additionally, we have recently received news from HMRC regarding changes to how investors are required to pay tax on their lending. Following these announcements we wanted to clarify what this means to investors.

Personal Savings Allowance

As some of you will be aware, the Chancellor announced in the Budget the launch of the Personal Savings Allowance. From April 2016 the first £1,000 of interest for basic rate taxpayers and the first £500 of interest for higher rate taxpayers will be tax free. Importantly this applies to both interest earned from traditional savings accounts or through peer-to-peer lending.

This is fantastic news for investors and a significant step by HMRC. We estimate this change will ensure that more than 80% of investors will now be able to earn tax free returns from Funding Circle, meaning you keep even more of your earnings.

Servicing fees

HMRC has recently confirmed that from 6th April investors will have to pay tax on the gross interest rate before deduction of fees. As a result we have made changes to the terms and conditions for investors and borrowers to clarify the way we cover the cost of loan servicing.

From April 6th we will no longer charge an annual investor fee. Instead we will take this same amount directly from the borrower repayments as a servicing fee.

There is no change to the amount paid by borrowers or the amount received by investors.

This change is reflected in clauses 8.1 and 15.1 and you can find updated investor terms and conditions here.

The loan conditions will also be changed (update to clause 5.2) to reflect the way in which fees are deducted, and you will be asked to accept them when you next bid. We hope this provides clarification.

Whilst making this change, we also made some additional amendments to the loan conditions. We have simplified the wording around the completion fee taken by Funding Circle from borrowers in clause 5.1, and deleted clause 8 which refers to our ability to restructure loans which we no longer require. This has also been removed from the terms and conditions for investors; where clauses 6.6 – 6.9 have been deleted.

Bad debt tax relief and ISA update

As we mentioned in the previous post, the Chancellor has confirmed that through self-assessment individuals will be able to make a claim for relief on losses incurred from April 2015. HMRC is still looking at the detail of this and we will provide further information once it has been clarified as to how this will work. You can read its proposed criteria for relief from bad debts here.

Additionally the Treasury has confirmed that you will be able to use your ISA to lend through Funding Circle by April 6th 2016.  We’re working with the Treasury around what type of ISA your lending will be included in and you can read more about our recommendations for a Lending ISA here.

Whilst the majority of investors will benefit from tax-free lending through the Personal Savings Allowance, these new changes will benefit every individual investor and is another sign that lending through marketplaces like Funding Circle is becoming a mainstream way for individuals to earn attractive returns on their money.

Breaking down the Budget

Today was the last Budget before the upcoming General Election and, alongside some of the headline pieces of news, the red box included a number of interesting updates for both Funding Circle investors and borrowers.

Bad debt tax relief

The main news for investors centred on the introduction of new bad debt relief for your lending through Funding Circle. This was first announced by the Chancellor in December’s Autumn Statement, but it was today confirmed that through self-assessment individuals will be able to make a claim for relief on losses incurred from April 2015. This is good news for all investors and, depending on your individual tax situation, we estimate you will soon be able to earn up to 25% more as a result of these changes.

ISA update

As expected there was no immediate update on including your lending within an ISA, however the Chancellor did confirm that results from the consultation will be released this summer, once the General Election has passed. Conversations have so far been very positive with the Treasury and we remain confident that there will be confirmation on how your lending will be able to be structured within an ISA this year. You can read more about our recommendations for a Lending ISA here.

In other tax news the Chancellor also confirmed that from next year the first £1,000 individuals earn from investments will be take free.

Business referral platform

Finally, for businesses there was some further news around access to finance and greater competition in the market. The Treasury confirmed that it will be inviting expressions of interest from platforms wishing to act as an intermediary for banks to refer on business customers to non-bank platforms. This news is designed to achieve greater collaboration between banks and non-banks and better help businesses looking to access finance – and follows on from existing bank partnerships Funding Circle already has with RBS and Santander.