At Funding Circle, our aim is for investors to be able to earn attractive returns that reflect the level of risk involved when lending to businesses. As part of this commitment, we regularly review our rates, taking a number of factors into account including macroeconomic trends, expected bad debt rates and wider competition in the market.
Over the last six years you have helped over 17,000 small businesses access finance. This has provided us with more credit performance data, allowing us to make even more accurate pricing decisions.
Following our recent review, we wanted to let you know about some upcoming changes to the fixed interest rates on the Funding Circle marketplace.
The new rates will not affect any loan parts you currently hold, and will not apply to property loans, which are priced individually. Taking into account the rate changes across all risk bands, and the proportion of loans we expect to list in each risk band, we expect the estimated return for investors with a diversified portfolio, after fees and bad debt, to be approximately 7.0%.
As an example, If we applied these new rates to the last 100 loans accepted on the marketplace (as of 19th October 2016), we estimate that the annual return for those loans after fees and bad debt, but before tax, would be 7.0%.*
What are the new rates?
From 7th November 2016, we will begin to list small business loans in the UK at the gross interest rates below. These rates are shown before fees and bad debts.
As some borrowers will have begun their application before the new rates are introduced, you may see loans listed at different rates for the same risk band and term length for up to 15 days from 7th November.
There will be no change to our estimated bad debt rates due to this change. You can see our estimated bad debt rates by risk band on our statistics page, and remember that by lending to businesses your capital is at risk.
If you use Autobid to lend to businesses, there is nothing you need to do as Autobid will continue to place bids on new loans at the new rates. The interest rates you currently have saved in your Autobid settings will still apply for buying loan parts on the secondary market. If you want to update your settings in order to buy loan parts on the secondary market at different rates, you can update them by logging into your account and navigating to Autobid.
How have the rates changed?
We are lowering rates for A+, A and B risk bands and increasing them for C (except for loans with a 6 month term, which are being lowered), D and E bands. You can see how the new rates compare to our current rates in the table below.
Why are the rates changing?
The new rates ensure we can continue to compete in an increasingly competitive market for lower-risk borrowers.
In addition, increasing the rates for some of our higher-risk bands will increase the loss coverage on those risk bands. The loss coverage is the number of times the estimated bad debt for that risk band would need to increase by, before it begins to affect the initial amount invested by investors. Loss coverage is important to consider when thinking about what might happen in an economic downturn.
The loss coverage for loans across all risk bands under the new rates will be 4.0x. Our latest stress tests estimate that in a downturn similar to the one experienced in 2008, bad debt for small business loans could increase by 2.0x. You can read more on how investor returns could be affected in an economic downturn here.
What does this mean for overall returns?
We anticipate that returns after fees and bad debt, but before tax, for investors with a well-diversified portfolio will not be significantly impacted by the new rates. There will be no change to our estimated bad debt rates due to this change. Looking at the proportion of loans we expect to list in each risk band after the new rates are introduced, we estimate that the annual return for investors across these loans, after fees and bad debt, will be approximately 7.0%.
This is similar to the estimated annual return for loans originated on the Funding Circle marketplace since 2014, seen in the table below.**
Since the Bank of England’s decision to cut the base rate in August, we have seen a general trend of falling interest rates across the wider market. The 7% estimated return is market leading when compared to other major peer-to-peer lending platforms. Past performance is not a guide to future performance, and by lending to businesses your capital is at risk.
This blog was updated with further information on 31/10/2016 at 18:00. Please note these rates only apply to the UK marketplace.
The Funding Circle team
*This estimated return is an estimate of the annual return after fees and bad debts that investors could earn. 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 100 loans accepted on the marketplace (as of 19th October 2016). The average return is compounded and before tax. You can see the full calculation for the current estimated return, which looks at the last 100 loans accepted on the marketplace, here.
**Data correct as of 1st October 2016. You can see the full calculations for past performance by loan origination year here.