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.
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.
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.
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.
The Funding Circle team