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.
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.
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.