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

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

What is a stress test?

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

What did we do?

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

Methodology

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

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

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

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

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

Building the Funding Circle stress testing model

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

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

Source: Office of National Statistics

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

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

Timing of a recession

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

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

PRA scenario and results

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

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

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

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

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

Validating our results

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

Actively monitoring the economic climate

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

Conclusion

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

Enjoy lending,

The Funding Circle team

* GDP = Gross Domestic Product

CPI =  Consumer Price Index

BOE = Bank of England

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

  

 

Earning for your retirement. October industry news

Peer to peer: Can you really get returns of 10%? – Moneywise

In a world of stagnant interest rates, peer-to-peer or direct lending platforms are offering people the opportunity to lend directly to borrowers so they can benefit from more of the return. By using a platform as a middleman, investors can enjoy more attractive returns, and businesses typically benefit from lower rates. In this piece, Moneywise interviewed a handful of investors to discuss their experiences across various platforms. Funding Circle investor Alison said, “…even if bad debts increased I still think I’d be earning more than going somewhere on the high street. I feel very comfortable with the risk I’m taking.” As you know, when you lend your capital it at risk.

6 steps you can take in your 20s to help you retire before 60 – Forbes

Retirement might not be on your mind just yet, but it’s never too early to start planning to ensure that you’re in the best financial position possible when the time comes. There are many different ways to start preparing yourself – big and small – depending on what you want to achieve, such as keeping better track of your spending or investing your spare cash. Simon Read, a personal finance expert, took an in-depth look into the topic and outlined some tips and tricks to take into consideration. Have a read on our blog.

How to start a business for next to nothing: Seven steps to getting your idea off the ground – Daily Mail

We all know that getting your business off the ground can be difficult, which is why the satisfaction and reward you feel once it begins to grow is that much sweeter. From managing growing pains and finding the right office space, to knowing when it’s the right time to take out a loan, every business owner is bound to face some hurdles along the way. In this article, learn how to tackle these challenges head-on and get back to doing what you do best: running your thriving business.  

This £4 billion problem stunting small business growth – City AM

When an exciting opportunity presents itself that has the potential to take your business to its next stage of growth, being able to get the right financial support is crucial. Every year, tens of thousands of small businesses struggle to access finance from the banks, according to figures from the British Business Bank. The rise of alternative funding sources, such as direct lending platforms, have given business owners much more choice and control over their development. With access to fast, fair and personalised finance that takes just days, more and more businesses are able to go even further.

London’s most influential entrepreneurs 2017 – Evening Standard

And finally, we’re pleased to see our co-founder Samir listed as one of London’s most influential entrepreneurs in 2017, alongside many other bright and motivated individuals. It remains evident that despite the backdrop of uncertainty caused by Brexit, London continues to be an attractive place to start and grow a business. In a recent case study, we spoke to Tom and Sian, founders of Bobbin Bikes, to learn about how their London-based bicycle business is on the road to success.

News

Your November Review – Insight and Analysis

YourNovemberReview

Last month was a global record month here at Funding Circle. In the UK alone, over £120 million was lent to businesses thanks to your continued support. We’re also pleased to announce that we’ve been recognised in the LinkedIn Top Companies list for 2017. Read more here or dive into your monthly analysis below.

Each month we bring you a regular column from Simon Read, a personal finance expert with extensive experience in helping people make the most of their money. In this month’s article Simon discusses the recent rise in interest rates and how this will affect your finances.

OctoberLendingFigures

Last month, you and other investors helped businesses to take new opportunities, create new jobs and drive energy into the UK economy — thank you for your continued support!

InfographicBlock

 

October highlights: meet two entrepreneurs

Our co-founder and UK Managing Director, James Meekings, met the founder of Sustainable Direction, the first business to borrow through Funding Circle. Watch the video to hear two entrepreneurs discuss the highlights and challenges of running your own business.

MonthlyTrends

These graphs show the most recent activity on our platform.

You’ve helped more than 8,900 small businesses access finance in the last 6 months…

Volume

Totalling over £630 million lent

Value

October 2017 sector breakdown

Amount lent to each sector

Sector

October 2017 regional breakdown

Amount lent to each UK region

LoansDefaultedLastWeek

As part of lending to businesses, a small percentage will not be able to fully repay their loan. This is known as bad debt and is a normal part of business lending. We believe diversification, where you lend no more than 1% of your total to each business, is the best way to reduce the impact this has on your return. Our automatic lending tool will help you diversify by splitting your investment across lots of businesses. We recommend lending £2,000 or more, so you can lend to 100+ businesses, with no more than 1% going to each one.  

Each week, we publish a list of the loans being defaulted on the Customer support section of our website under ‘Announcements.’ To see a breakdown of the loans defaulted last week simply click on loans defaulted 2nd November 2017.  For further information on why Funding Circle defaults loans you can read our FAQ here.

Collections

HowItWorks

You can also read more about how our collections and recoveries process works (part one and part two) on our blog.

Up next in November, we’ll be looking at the impact your lending is having on the UK economy and bringing to life some of the businesses you’ve helped access finance.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

*Data from CEBR report

This blog is a general summary, and should not replace financial advice tailored to your specific circumstances. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. If you have any questions, please speak to your professional advisor or seek independent specialist advice.

Read between the lines: How can rising interest rates affect your finances?

We regularly bring you a column from Simon Read, a personal finance expert with extensive experience in helping people make the most of their money. In his last piece, Simon provided some pointers on planning for retirement.

The much-anticipated interest rate rise finally hit at the beginning of November. It was interesting for two main reasons.

First is the fact that it was the first rise in the Base Rate for 10 years. Do you recall what it climbed to then, back in July 2007? The base rate actually went up 0.25% to 5.75%. That seems incredible now, when we’ve experienced almost a decade of record low interest rates.

In fact it’s only been for 18 months that the rate has been at its all-time record low of 0.25%. This month’s rate increase saw it climbing back to 0.5%, where most savers and borrowers have experienced it since the Bank of England lowered it to that level to March 2009.

But the second interesting thing about the rate rise is what it tells you about your money. If you haven’t already got the message that it should be a wake-up call for you to check your finances, then now is the time to get your house in order.

It’s extremely likely that the rate increase is just the first of many over the next 12 months or so. The Bank of England will need to act again to protect Sterling ahead of Brexit and to counter rising inflation. So you should be acting to protect your interests, with interest being at the forefront of your mind.

Think about your savings. While a rise should mean better interest offered at banks and building societies, rates are still likely to remain paltry on deposit accounts. That means thinking carefully about where to stash your nest egg and making the most of alternative options such as peer-to-peer lending or, if you’re prepared for greater risk, stock market-linked investments.

What about your mortgage? If you’ve got a fixed rate loan then you won’t notice the effect of any interest rate rise until the end of your deal. But with further increases ahead, by the time you arrange a new deal, charges may be much higher.

For that reason it’s worth looking at switching sooner.

However you need to check if there are any early repayment penalties on your existing deal and do your sums carefully to ensure that switching will actually be worthwhile in the long-term, especially after taking into account any new charges you may incur.

If you have a variable rate mortgage or tracker then you will be hit by the rate rise much sooner.

By how much? The Nationwide building society reckons a 0.25% rate rise would increase monthly payments by £15 to £665 for the average variable mortgage, or an extra £180 a year. Depending on the size of your mortgage, the rate increase could cost you much more.

However much it is, it’s worth checking out fixed mortgage deals to work out if it’s worth changing. If you have a low variable rate, then you should probably stick with that for the moment. If you’re paying 3% or more, however, then you would be better off finding a lower fixed rate.

And in the months ahead keep an eye on rates.

Some lenders priced in the rate rise to their mortgage rates some weeks ahead. If you see a trend for fixed rates to start to rise, that may be the time to act, before the best low deals disappear altogether.

The views expressed here belong to the author and do not represent those of Funding Circle. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice.

The information and views contained here are provided solely for informational purposes and should not be construed as legal, tax, regulatory, accounting or investment advice, or as a recommendation or an offer or invitation by Funding Circle.

To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, such information contained here.

If you have any questions, please speak to your professional adviser or seek independent specialist advice

October’s Lending Impact and Borrower Stories

OctoberInvestorImpact
In this month’s post, we begin with Accountancy Learning, a business introduced by one of our partners, who were able to grow and develop thanks to your lending. Next up, meet the founders of Bobbin Bikes and hear our top tips to prepare for a brilliant bonfire night.

AGreatMonthFor
At Funding Circle we have a number of partners who recommend us to their clients if they’re in need of finance, such as JustEat, and business advisors like ActionCOACH. This month we want to talk about Accountancy Learning, a specialist training provider for accountancy learning qualifications, who were referred to us through ActionCOACH.

After struggling to get a bank loan quickly enough, Accountancy Learning borrowed through Funding Circle. We believe partnerships like this will enhance the future lending opportunities for Funding Circle investors and give more businesses the opportunity to flourish. Head to our blog to read more.

OctoberSuccessStory
BobbinBikes

Meet Tom and Sian, founders of Bobbin Bicycles, in our latest case study video. The two met in Amsterdam and immediately fell in love with The Netherland’s bicycles. After noticing a gap in the UK market for everyday bikes, the pair set up Bobbin Bicycles back in 2007. The business has gone from strength to strength – even David Beckham’s daughter has been seen riding one on Instagram! Thanks to you and other investors, Bobbin Bicycles borrowed back in 2016 to purchase new stock and keep up with the influx of orders. Find out more and watch the video to hear about their passion for their business.

Preparing for bonfire night: our top five essentials

Whether you’re going to a big public display or hosting your own, we’ve put together a list of our top five products to set you up for an enjoyable and warm night under the fireworks. All these businesses have been able expand and achieve their business goals thanks to investors. Read more.

September’s Lending Impact and Borrower Stories

In case you missed it, here’s last month’s post, where we met Christine, founder of The Kite, Surf & Sup Co, and prepared for Oktoberfest with four great London breweries.

Up next

At the beginning of November, we’ll publish ‘Your October Review – Insight and Analysis’ including statistics from across the platform and helpful tips to make the most of your investment.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

Your October Review – Insight and Analysis

Your October Review
Last month Funding Circle investors, like you, lent over £100 million to UK businesses to help them grow and develop. Dive in below for your monthly analysis.

We’re excited to be shortlisted for the Moneyfacts Consumer Awards. If you’ve received great service from Tom, Sophie, Fran or any of the Funding Circle team, please vote for us.

September lending figures
Last month, you and other investors helped businesses to take new opportunities, create new jobs and drive energy into the UK economy — thank you for your continued support!

October stats

September industry news

Thanks to investors, last year over £1 billion was lent to 10,000 businesses through Funding Circle, helping to create 25,000 new jobs. CEO and co-founder Samir Desai discusses our growth and future plans. Read about this and much more in last month’s Industry news.

Monthly trends
These graphs show the most recent activity on our platform.

You’ve helped more than 8,300 small businesses access finance in the last 6 months…
October volume of loans

Totalling over £589 million lent

October value of loans

September 2017 sector breakdown

Amount lent to each sector

October sector

September 2017 regional breakdown

Amount lent to each UK region
October region

As part of lending to businesses, a small percentage will not be able to fully repay their loan. This is known as bad debt and is a normal part of business lending. We believe diversification, where you lend no more than 1% of your total to each business, is the best way to reduce the impact this has on your return. Our automatic lending tool will help you diversify by splitting your investment across lots of businesses. We recommend lending £2,000 or more, so you can lend to 100+ businesses, with no more than 1% going to each one.  

Each week, we publish a list of the loans being defaulted on the Customer support section of our website under ‘Announcements.’ To see a breakdown of the loans defaulted last week simply click on loans defaulted 28th September 2017.  For further information on why Funding Circle defaults loans you can read our FAQ here.

Collections and recoveries

How it works

You can also read more about how our collections and recoveries process works (part one and part two) on our blog.

Up next in October, we’ll be looking at the impact your lending is having on the UK economy and bringing to life some of the businesses you’ve helped access finance.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

*Data from CEBR report

This blog is a general summary, and should not replace financial advice tailored to your specific circumstances. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. If you have any questions, please speak to your professional advisor or seek independent specialist advice.

FinTech is reaching new heights. September industry news

Business voice has to get better at getting its views across – Financial Times

As the discussions around Brexit continue, an underlying question that remains is how the outcome will affect the growth of British businesses. Whether that’s access to capital or access to talent, we want to ensure that businesses are able to reach their full potential after we leave the European Union. In this piece, our co-founder Samir Desai gives his views, alongside other industry leaders, on how we can achieve the best result for the sector and the importance of making the voice of business heard.

Britain’s leading FinTech firms are banding together to work out a Brexit strategy – Business Insider

With the aim of producing an ambitious post-Brexit vision for the UK’s financial technology (FinTech) sector, leading companies have formed an industry body (the FinTech Delivery Panel) to work with the government. Today, countless firms haven shaken up our financial world, making it possible for individuals to have control of their finances straight from their fingertips. We want to ensure that this continues once we leave the EU and that London remains an attractive place to grow a FinTech business.

Adopting FinTech is saving UK businesses £4.6bn – CityAM

A recent survey conducted by invoice finance platform, MarketInvoice, revealed that nearly two-thirds of UK businesses are adopting FinTech and making savings as a result. Not only is FinTech helping many of these companies drive their user experience and service forward, but they’re also benefiting from the choice available when looking for finance. Christine, founder of KiTE, SURF & SUP CO and windsurfing world-champion, is a great example of a flourishing business who is reaching new heights thanks to online lending.

There are two new types of Isa – should you switch to them? – the Telegraph

Investors are also seeing more choice when it comes to investment options. Over the past year, the number of Isas available has grown to include various different types that can help make your money work harder. From the Help-to-Buy Isa to the Innovative Finance Isa, you can now choose one to suit your unique preferences. At Funding Circle, we’re looking forward to being able to offer you tax-free returns with the Funding Circle ISA which we plan to launch this tax year. But remember, when you lend to businesses, your capital is at risk.

Funding Circle hits £50 million in revenue as CEO restates IPO ambitions – Business Insider

And finally, last year you and other investors lent over £1 billion to 10,000 small businesses across the world, creating an estimated 25,000 new jobs. From helping Jim’s outdoor education company go for growth, to supporting David’s IT business’ expansion plans, your continued investments are allowing booming businesses like these go even further. In this article, Samir discusses the positive growth of Funding Circle over the years and our plans to help thousands more investors and businesses across the world. Read more in the Times.

News

September’s Lending Impact and Borrower Stories

SeptemberInvestorImpact
In this month’s post, find out how your lending has helped businesses across the UK achieve their goals. See borrower Jim in a BBC documentary next week, watch investor Jan meet up with a kitesurfing business she lent to, and read our ideas for an amazing Oktoberfest.

A great month for
Jim, Managing Director at Channel Group, who’ll feature on Saving Lives at Sea on Tuesday next week. The BBC documentary series follows the Royal National Lifeboat Institution and the ordinary men and women who race to the rescue within minutes of a cry for help. We caught up with Jim last month to find out how Funding Circle investors, like you, have helped grow his outdoor activity business.

SeptemberSuccessStory
Watch our new video as Jan, a Funding Circle investor, heads to Worthing to meet Christine and have her first kite surfing lesson! Find out how your lending helped Christine pursue her dreams and set up The Kite, Surf & Sup Co.

Kitesurf Jan

Oktoberfest: raise a glass to these 4 glorious breweries!

Need some inspiration this Oktoberfest? Read about some great breweries which, thanks to the help of Funding Circle investors, were able to grow their business and continue offering a fantastic service for all of us to enjoy.

August’s Lending Impact and Borrower Stories

In case you missed it, here’s last month’s post, when we met husband and wife team Peter Robinson and Tracy Pound, and enjoyed the last of summer at Britain’s best beaches.

Up next

At the beginning of October, we’ll publish ‘Your October Review – Insight and Analysis’ including statistics from across the platform and helpful tips to make the most of your investment.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

Your September Review – Insight and Analysis

Your September Review

On 18th September we’re launching an exciting new lending experience to make lending to businesses through Funding Circle simpler, better and fairer for all investors. Read about the two new lending options on our blog or dive in to your monthly analysis below.

Last month, you and other investors helped businesses to take new opportunities, create new jobs and drive energy into the UK economy — thank you for your continued support!

August industry news

Written up in Bloomberg, Funding Circle co-founder and CEO Samir Desai met borrower By the Horns brewery to find out how the EU referendum has affected their business. Read this and more in last month’s industry news.

Monthly trends

These graphs show the most recent activity on our platform.

You’ve helped more than 8,500 small businesses access finance in the last 6 months…

Number of loans September

Totalling over £605 million lent

Value of loans

August 2017 sector breakdown

Amount lent to each sector

August sector

August 2017 regional breakdown

Amount lent to each UK region

Region August

Loans defaulted last week

As part of lending to businesses, a small percentage will not be able to fully repay their loan. This is known as bad debt and is a normal part of business lending. We believe diversification, where you lend no more than 1% of your total to each business, is the best way to reduce the impact this has on your return. You can diversify automatically using our Autobid tool.

Each week, we publish a list of the loans being defaulted on the Customer support section of our website under ‘Announcements.’ To see a breakdown of the loans defaulted last week simply click on loans defaulted 31st September 2017.  For further information on why Funding Circle defaults loans you can read our FAQ here.

Collections and recoveries

How it works

You can also read more about how our collections and recoveries process works (part one and part two) on our blog.

Up next in September, we’ll be looking at the impact your lending is having on the UK economy and bringing to life some of the businesses you’ve helped access finance.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

*The current 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 today. 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.

This blog is a general summary, and should not replace financial advice tailored to your specific circumstances. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. If you have any questions, please speak to your professional advisor or seek independent specialist advice.

 

A not so quiet summer. August industry news

Aegon eyes £160m deal for small businesses – the Times

Last month we were pleased to announce a strategic long-term partnership with Aegon to support the growth of UK small businesses. In the first 12 months of a four years program, the initial £160 million investment will help around 2,600 businesses, creating up to 6,400 new jobs. Stephen Barclay, Economic Secretary to the Treasury said, “This partnership with one of the UK’s largest FinTech firms is further proof that the UK remains the global leader in FinTech.” Read more in CityAm. Also, tune in on Bloomberg (skip to 34:00) to hear our CEO and co-founder Samir discuss the news and his vision for the future of small business lending.

London Craft Brewer Rides Out Brexit With Hoppy Ales and Hope – Bloomberg

By the Horns Brewery is an excellent example of a thriving business that has gone for growth thanks to accessing finance through online lending. The trendy brewery’s loan was funded by the European Investment Fund through our platform, which allowed the team to invest in a new bottling line. Samir recently met with the business owner, Alex Bull, who took him on a tour of his site and discussed how Brexit is affecting his business. With the pound at record lows, British goods are cheaper to export overseas. Read the full story in Bloomberg and learn about the importance of retaining access to capital post Brexit.

Debunking the peer-to-peer lending myths – CityAM

As online lending continues to develop, a range of recurring questions have arisen such as: ‘will platforms suffer in an economic downturn?’ and ‘what will happen when interest rates rise?’. Various platforms have conducted stress tests to reveal what could happen to investor returns in times of economic stress, including us. Our results predict that in a deeper and longer-lasting recession than 2008, investor returns are likely to remain attractive. Although as always, capital is at risk. Read more about the potential future growth of the industry in Forbes.

Funding Circle is kicking off a marketing bonanza with a Great British Bake Off TV ad – Business Insider

Shortly after the exciting introduction of our fresh new look, we launched a TV advertising campaign that celebrates those who are Made to do More. Premiered during the Great British Bake Off last week, our TV ads will allow us to reach a wider audience and help bring more amazing businesses to the platform that need your continued support. You can see both adverts on our blog. Feel free to like, share and help us spread the word, so we can continue to help businesses and investors across the UK go further.

Funding Circle simplifies its investment protocol – Business Insider

And finally, as we announced on 21 August, we will launch a significantly improved and upgraded version of our existing Autobid and Autosell lending tools on 18 September, and the option to manually choose which businesses to lend to will be withdrawn. This change comes with the aim of creating a level playing field for all investors and making lending simpler, better and fairer for all. We appreciate that this is a significant change so if you have any questions or concerns, please provide us with your thoughts here. For more information, check out our blog or read more in AltFi.

News

Removing manual bidding – your questions answered

Last week we announced some improvements to how lending and selling through Funding Circle will work, with the aim of making lending simpler, better and fairer for all investors. 

Since then, we’ve been listening to your feedback and have put together answers to the most frequent questions you’ve been asking.

Your account from 18th September

If I don’t choose a lending option, can I still use my Funding Circle account from 18th September?

If you are an Autobid user, you will automatically continue to lend to businesses from 18th September and you do not need to select a lending option.

If you do not use Autobid you will need to select a lending option in order to continue lending to businesses from 18th September. If you do not select a lending option you can continue to login to your account, view your existing portfolio and withdraw your available funds, however you will no longer lend to any more businesses.

From 18th September, you will need to accept the new Terms and Conditions in order to continue using your Funding Circle account.

Will I be able to pause lending, or will it always be turned on?

You will be able to pause your lending at anytime. Your repayments will not be lent to more businesses until you turn lending back on.

What happens to my existing loan parts?

The changes we are making will only affect lending to businesses from 18th September, and will not affect any existing loan parts you own. You will continue to receive repayments from existing loan parts from 18th September, even if you do not choose a lending option.

How can I change my lending option?

  • Before 18th September: If you are not being transferred to a lending option (for example if you don’t currently use Autobid) you will be able to select an option the next time you log into your Funding Circle account. You can change your lending option by navigating to the Autobid page and following the link.
  • On and after 18th September: you will be able to change your lending option at anytime. Your choice of lending option will only affect any new lending, and will not change existing loan parts you own.

Selling loan parts

How will the secondary market work?

  • Before 18th September: On 21st August we launched a sell page that simplifies how investors buy and sell loan parts. You can sell your loan parts by going to the sell page and telling us how much you’d like to withdraw. We’ll list a selection of your loan parts for you approximate to that value. Once they’ve sold, the loan parts will appear as available funds which you can transfer to a nominated bank account. We have also removed the 0.25% fee to sell your loan parts. You will be able to sell individual loan parts and set a premium or discount up until 18th September.
  • On and after 18th September: Any remaining loan parts listed for sale at a premium or discount will be delisted and the option to sell loan parts individually will be withdrawn. All loan parts listed from 18th September will be sold at par value. All investors will buy existing loan parts sold by other investors, based on their lending preference.

Can I still buy or sell individual loan parts?

From 18th September you will no longer be able to buy individual loan parts from other investors, or sell individual loan parts to other investors.

Will I be able to sell loan parts that are larger than £100?

Yes. The new tool will only split your lending to a single business into smaller parts of £100 when lending to new businesses. You may still sell loan parts larger than £100 to other investors, providing they are no larger than 0.5% of the buyer’s portfolio.

Your new lending options

Will I be well-diversified by lending 0.5% of my portfolio to each business?

Since 2010, every investor who has lent no more than 1% of their portfolio to a single business for at least a year has made a positive return, with 92% earning at least 5% a year after fees and bad debt. This increases to 93% when an investor lends no more than 0.5% of their portfolio each time.

There are no guarantees with any form of investment, but lending 0.5% to each business will provide you with a very well-diversified portfolio. You can see this from the graph below, which shows the annualised return earned by 95% of investors lending for at least one year, by the number of businesses lent to.

Data is correct as of 1st July, and past performance is not a guarantee of future returns. Remember, by lending to businesses your capital is at risk.

Will I be able to choose the loan term of the business I lend to?

Our aim is for you to build a well-diversified portfolio and have the best chance of earning a stable return by lending to a wide range of businesses. Over the past seven years we have built up a large database of historical loan performance and have found there to be no significant difference in how businesses perform by loan term. In addition, if you do want to access your money early you can sell your loan parts to other investors and there is no cost to do so.

Will I now be investing in a fund?

No. By lending through Funding Circle you always lend directly to your own individual portfolio of businesses and no investor account is the same. This will not change as you will continue to enter into loan contracts directly with each borrower you lend to, so you are only exposed to the performance of those borrowers. This is very different to a fund where your money would be pooled together with all other investors and the return investors receive depends on the overall performance of the fund.

Funding Circle ISA

When are you launching a Funding Circle ISA?

We will be launching the Funding Circle ISA this tax year. Given we expect the Funding Circle ISA to be popular, we plan to launch it at a time to suit demand from both investors and borrowers. This will allow us to manage liquidity on the platform and help investors to earn attractive, stable returns.

Can I transfer my existing loan parts into the Funding Circle ISA?

No. For regulatory reasons, you will not be able to transfer any existing loan parts you own into a Funding Circle ISA. You will need to withdraw funds to your nominated bank account, before transferring them into your Funding Circle ISA.

If you can’t see your question here, you can find more information about your new lending experience in our FAQ.

Enjoy lending,

The Funding Circle team

August’s Lending Impact and Borrower Stories

August Investor Impact
In this month’s post, find out how your lending has helped businesses across the UK achieve their goals. First up, meet husband and wife team Peter Robinson and Tracy Pound who borrowed this month. Then we’re headed to the beautiful Exmoor National Park to meet adventure activities specialist the Channel Group and finally we’re enjoying the last of summer at Britain’s best beaches. Dive in below.

A great month for rebrand
Peter RobinsonThis month we had the pleasure of meeting Peter Robinson, who runs award-winning insurance broker business Prizm Solutions in Staffordshire. The business was formed in 2006 when Peter saw an opportunity to radically change the way insurance was transacted.

Today, they have countless recommendations of how they’ve helped clients with their insurance needs; from motor insurance, to liability insurance and employee benefits to name a few. Prizm has also been recognised by their peers, being shortlisted for Community Broker of the Year at the UK Broker Awards 2017.

During our conversation, Peter told us that his wife, Tracy Pound who runs IT training and consultancy specialist Maximity, has been shortlisted for Business Role Model of the Year in the Women in IT awards 2017. On behalf of the Funding Circle community we’d like to wish Peter and Tracy the best of luck in their upcoming awards!

You and other investors helped Prizm Solutions borrow over £150,000 this month to acquire another business and they’ll be increasing their team to 16 people.

August's success story
Jim Channel Training

Outdoor enthusiast goes for growth

The Channel Group was started in 2012, when Managing Director Jim Whittaker and his friend Darren quit their day jobs to found a business with a simple mission: to get more people out and about in the beautiful outdoors.

Five years on, Jim and his team now offer a diverse range of adventurous activities, outdoor education and personal development programmes on the edge of the beautiful Exmoor National Park. You and other investors helped the Channel Group keep up with high demand for their courses and progress with their growth plans.  In this short video meet Jim and hear his story.

Support local this August
Make the most of the final few weeks of summer and head to one of our Britain’s beautiful beaches. From stunning north-east Scotland to the Cornish coast, join our tour of six local businesses where you can go for a bite to eat, have a refreshing drink or stay the night in these top spots.

July’s Lending Impact and Borrower Stories

In case you missed it, here’s last month’s post, when we caught with our first ever borrower on the Isle of Alderney and met business owner Christine Johnson in Brighton to find out how investors, like you, have helped take her business to the next level.

Up next

At the beginning of September, we’ll be publishing ‘Your September Review – Insight and Analysis’ which will focus on the numbers and include some helpful tips to help you make the most of your investment.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

We’re launching an exciting new lending experience

Since we launched Funding Circle in 2010, our aim has been to enable investors to earn attractive, stable returns by lending directly to small businesses.

Recently, we have been reviewing how lending through Funding Circle works, with the aim of making lending simpler, better and fairer for all investors. After careful consideration, we have taken the decision to make some improvements to your lending experience.

On 18th September, we will launch a significantly improved and upgraded version of our existing Autobid and Autosell lending tools, and the option to manually choose which businesses to lend to and which loan parts to sell will be withdrawn.

How will the new lending experience work?

Investors will be able to choose one of two new lending options based on their personal preference. Both options will be available as a Funding Circle ISA, which we intend to launch later this tax year.

  • Balanced: you will automatically lend to the full range of creditworthy businesses (A+ to E), aiming to achieve an attractive, stable return. This will allow you to build a balanced portfolio similar to the makeup of small businesses in the UK today. The projected return is estimated to be 7.5% per year after fees and bad debt.
  • Conservative: you will focus on lending to businesses that have been assessed as lower risk (initially A+/A) but with a lower projected return. The projected return is estimated to be 4.8% per year after fees and bad debt.

Your actual return may be higher or lower, and by lending to businesses your capital is at risk. You can read more about the improvements we are making, and what they mean for you, on our announcement page.

As part of the improvements we are making we are also updating the interest rates at which you lend to businesses. The projected return of both lending options have taken these changes into account. We’ll be introducing these new rates on 30th August, and you can read more about them here.

As part of this change we will also be updating our Terms and Conditions. You can view a summary of the main changes here.

We always want to hear your thoughts, so please fill out the feedback form on our announcement page if you would like to give us your feedback.

Enjoy lending,

The Funding Circle team

Update to Funding Circle rates

At Funding Circle, our aim is to allow you to earn an attractive, stable return by lending directly to a diversified portfolio of creditworthy businesses. To help you achieve this, we regularly update and improve our assessment processes. This also includes regularly reviewing the interest rates at which you lend to businesses.

Following our recent review, we wanted to let you know about some upcoming changes to the interest rates on our platform and our assessment process.

What are the new rates?

From Wednesday 30th August, 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 debt. The projected annual return for the overall Funding Circle loanbook, after fees and bad debt, will be 6.7%*.

We made an important announcement today about some improvements we are making to how lending through Funding Circle will work from the 18th September, including introducing two new lending options. Taking into account these changes, the projected annual return for these lending options, after fees and bad debt, is estimated to be:

  • Balanced – 7.5%
  • Conservative – 4.8%

Your actual return may be higher or lower, and by lending to businesses your capital is at risk.


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 up until 5th October.

How have the rates changed?

You can see how the new rates compare to our current rates in the table below:

Why are the rates changing?

When reviewing rates we take a number of factors into account, including macroeconomic trends, the expected mix of risk bands of borrowers, expected bad debt rates and wider competition in the market, which continues to be increasingly competitive for lower risk businesses. The new rates will allow you to continue to lend to established, creditworthy small businesses while earning an attractive, stable return.

Will this affect the businesses you lend to?

Over the past seven years, 64,000 investors have lent £2.5 billion to more than 25,000 UK businesses. This has provided us with significant amounts of performance data to help improve our statistical credit models and means we can provide even more accurate pricing decisions to borrowers. With these improvements to our credit models, you can expect to see an adjustment in the mix of risk bands of borrowers in the coming months. This adjustment means the new expected bad debt rate for the overall Funding Circle loanbook will be 2.3% annually.

The improvements also mean we can make updates to our policy criteria. Our policy criteria give direction to business owners and help filter out businesses that have a low likelihood of being approved, so our credit assessment team only spend time on the right type of applications. Our latest policy criteria are:

  • A minimum of two years trading history
  • At least 1 year of filed or formally prepared accounts
  • No County Court Judgments (CCJs) registered in the last 12 months, with no outstanding CCJs larger than £1000

Do you need to do anything?

The new rates will not affect any loan parts you currently hold, and will not apply to property development loans, which are priced individually.  

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 until 18th September, when the new lending options will be introduced.

As a reminder, these new rates will go live on Wednesday 30th August. If you have any questions about today’s news, please get in touch.

Enjoy lending,

The Funding Circle team

*The projected return is an estimate of the annual return, after fees and bad debts, that a diversified investor could earn. It is calculated by taking the distribution of loans, across both risk band and loan term, that we expect to be funded on the marketplace.

The return is then calculated by taking the gross interest rate of these loans, then deducting the fees and estimated bad debts that will occur in the future. The average return is weighted by loan amount, compounded and before tax. See the full calculation here.

Update to our Terms and Conditions

At Funding Circle, we want all investors to have a simpler, better and fairer lending experience. To help achieve this, on 18th September we will be making a number of important improvements to how lending through Funding Circle will work. You can read more about these improvements here.

We will also be updating both our Investor and Borrower Terms and Conditions (collectively “Terms”) on 18th September, along with our Privacy Policy. We will also be making some small, related changes to the Loan Conditions. In addition, we’ve created a new Website Terms of Use.

What you need to do

The changes will go into effect for all existing investors and borrowers on 18th September 2017, and will apply to all new lending from that date.

If you are an existing investor, the next time you login to your Funding Circle account you will be prompted to read more about the changes we are making, and we’ll ask you to agree to the new Terms. Also, if you are an investor that currently chooses the individual businesses that you lend to, you will be asked to choose your new preferred lending option.

If you’re an existing borrower, it’s important that you read the new Terms because they will apply to you; however you won’t need to do anything else.

What is changing?

We’re making the following changes to our Investor and Borrower Terms:

We’re making them simpler and easier to understand

  • We’re restructuring the order, layout and sections of the Terms to make them easier to read.
  • We’re simplifying the language used to describe:
    • The process of becoming an investor or borrower.
    • How lending will work through the platform.
    • How you engage with the platform and with us.
    • The services we provide to you.
    • The security provisions for secured loans and our collections and recoveries processes.
  • To make the Terms shorter and clearer:
    • We are moving the definitions to a separate glossary to make them easier to find.
    • We’re removing some of the descriptions of how the platform works, for example how to transfer money into your account. You’ll still be able to find these in the Investor Guide and FAQs from 18th September.

We’re reflecting the new investor lending experience

  • The description of how your funds will be matched to businesses is being updated.
  • The section on how to sell your loan parts will be changing to reflect the improvements we have made, and that it will be a fully automated process.
  • From today we have become the first major lending platform to charge no fees for selling your loans, so we have removed references to sale fees from the Terms.

Your rights and our obligations

  • We are clarifying the process you can follow to cancel your Funding Circle account.
  • We’re simplifying the termination rights that apply in relation to your Funding Circle account.
  • We’re clarifying why we may make future changes to the Terms, and the way in which we’ll communicate them to you.

Changes to our Loan Conditions

  • We’re updating the terminology in the Loan Conditions to reflect the new lending experience and mirror the language of the new Terms (for example, we are removing words like “bids” and “listing”).
  • We’ve simplified the language by adding new definitions (for example, “Event of Default”, “Loan Completion Date” and “Total Amount Payable”)
  • We’re amending the section that describes the legal mechanism through which a loan part is transferred from one investor to another when loan parts are sold and bought.
  • We’ve included new circumstances where a borrower may be defaulted, for example where they are abusive to Funding Circle employees.
  • We’re rewording the fees section so it’s easier to understand.

Changes to our Privacy Policy

  • We’re simplifying the policy to make it easier to read and navigate.
  • We’re making some minor changes to our Privacy Policy so that it aligns with our Cookies Policy.
  • We’re making it easier for you to contact us to discuss your privacy rights.

New Website Terms of Use

  • We’ve created Website Terms of Use, which apply to everyone who uses our website even if you are not an investor or borrower.
  • The Website Terms of Use are designed as a set of rules and guidelines that govern your use of the website.

If you have any questions, please don’t hesitate to contact us and we’ll be happy to help.

Enjoy lending,

The Funding Circle team

Happy 7th birthday Funding Circle!

In August 2010, Funding Circle was launched by three university friends, Samir Desai, James Meekings and Andrew Mullinger above a waffle shop. Their small team of five huddled around a telephone battling for their first customers and originated £2 million of lending in their first year.

Seven years on, you and other investors have supported the growth of 32,000 small businesses across the UK, US, Germany and the Netherlands. We’re blown away by how far we’ve come together so far and that’s all thanks to your lending.

Investors earning for their future

69,000 people and organisations are lending to small businesses, including local councils, the government-owned British Business Bank, the European Investment Bank and our most recent investor, Aegon. This new strategic lending partnership will support the growth of approximately 2,600 UK businesses, creating an estimated 6,400 new jobs in the first year. A diversified investor base ensures our platform is stable and sustainable, even in times of economic stress.

Businesses driving the economy forward

32,000 businesses have accessed finance, including David’s IT business, a doggy daycare in Suffolk, and our first ever borrower, Sustainable Direction. We recently met Dr John Henry Looney, founder of Sustainable Direction, to see how his business has grown since 2010.

Small businesses like these are the driving force behind much needed job creation, which in turn fuels productivity and the economy. Lending through Funding Circle has supported the creation of approximately 80,000 new jobs across the world.

And finally, we’re proud to have launched a new look, which celebrates the people who have turned their passions into livelihoods, supporting their families and local communities.

Thank you for choosing to be on this journey with us – Funding Circle wouldn’t be where it is today without all of your support.

How do small business owners feel about Brexit?

During the summer, we spoke to more than 1,325 small business owners to canvass their views on the impact of the recent election and ongoing Brexit negotiations. What we found was that more than two-thirds of small businesses that import goods and services expect costs to increase when Britain leaves the European Union.

When we asked owners specifically about the expected cost increase, importing small businesses told us that they expect their average costs to increase by £5,300 per month resulting in £60,000 per year of extra spending. With 214,300 small businesses currently importing goods or services in the UK, the potential impact is vast at a local and national level.

Of course, Brexit negotiations have only really just begun, so it’s still tricky to know exactly what the impact our our exit from the EU will be. What is clear is that investors lending directly to small businesses is incredibly important to our nation’s prosperity. In the UK, small businesses account for 50% of GDP and 60% of private sector employment, so your support for them is crucial!

The results weren’t all doom and gloom, however, as the majority of businesses we spoke to expect to hire at least one new member of staff over the next year. Business owners were also pleased to state that they think the general election result will soften our EU exit strategy – which the majority think will be good for their business operations.

Investors at Funding Circle include 60,000 individuals, local and national government, the European Investment Bank and financial institutions such as pension funds. By opening up small business lending to a wide range of investors, Funding Circle has improved competition in the market, supported job creation and reduced small business dependency on bank lending.

To date investors have lent £2.5 billion to more than 25,000 UK small businesses. Businesses funded through the platform typically access the capital they need in days, and independent research found that 94% of businesses would come back to Funding Circle first in future.

If you’re a small business looking for finance, visit our website to check if you qualify in just 30 seconds.

Your August Review – Insight and Analysis

August review
Each month we bring you a column by Simon Read, a personal finance expert with extensive experience in helping people make the most of their money. Last time, Simon looked at the effect rising inflation can have on your funds.

This month, fresh from filming the BBC’s Right on the Money Simon discusses how to look after the pennies with savvy financial planning. Also included in this month’s post, find out about our historic partnership with JustEat. Dive in below.

July lending figures
Last month, you and other investors helped businesses to take new opportunities, create new jobs and drive energy into the UK economy — thank you for your continued support!

July lending

July industry news

Included in last month’s industry news, The Times interview Funding Circle borrower Yilmaz Guney, who runs a Turkish Restaurant in North London, to understand how he’s benefited from Funding Circle & JustEat’s recent tie-up.

These graphs show the most recent activity on our platform.

You’ve helped more than 8,700 small businesses access finance in the last 6 months…

 No of loans July final

Totalling over £617 million lent

 Amount of loans July

July 2017 sector breakdown

Amount lent to each sector

July sector

July 2017 regional breakdown

Amount lent to each UK region

July region

Loans defaulted last week
As part of lending to businesses, a small percentage will not be able to fully repay their loan. This is known as bad debt and is a normal part of business lending. We believe diversification, where you lend no more than 1% of your total to each business, is the best way to reduce the impact this has on your return. You can diversify automatically using our Autobid tool.

Each week, we publish a list of the loans being defaulted on the Customer support section of our website under ‘Announcements.’ To see a breakdown of the loans defaulted last week simply click on loans defaulted 3rd August 2017.  For further information on why Funding Circle defaults loans you can read our FAQ here.

Collections and recoveries

How it works
You can also read more about how our collections and recoveries process works (part one and part two) on our blog.

Up next in September, we’ll be looking at the impact your lending is having on the UK economy and bringing to life some of the businesses you’ve helped access finance.

As always, if you have any questions or comments our dedicated team are here to help. And if you have any further suggestions we’d love to hear them.

Enjoy lending, the Funding Circle team

*The current 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 today. 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.

This blog is a general summary, and should not replace financial advice tailored to your specific circumstances. Funding Circle is not authorised to, and does not, provide investment, tax, legal or regulatory advice. If you have any questions, please speak to your professional advisor or seek independent specialist advice.

Welcome to our fresh new look

Today we’re really pleased to announce that Funding Circle has a new look.

In just seven years, 32,000 small businesses have financed their growth and 69,000 investors have supported their future through our platform – which is something we’re very proud of. However, the opportunity to keep progressing is huge, and there is so much more that we can do to help thousands more customers turn their dreams into reality.

The heart of our new brand

There’s a common thread that connects small business owners, investors and the people who work at Funding Circle. We share a uniquely driven yet positive attitude to work and life, a restless determination to succeed and the tenacity to get there. We call this Made to do More.

Made to do More is an articulation of the approach we’ve always had at Funding Circle. We want to celebrate the people who’ve turned their passions into livelihoods, supporting their families and local communities. Ordinary people doing extraordinary things, pushing the economy forward.

Our aim is to become the first choice for small businesses and investors globally – helping you to create more jobs and earn more for your future. We’ve come a long way together, but our journey has only just begun and we’re really excited to see what the future will bring.

News