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Bad Debts Resurface At Funding Circle


A long question from 4thWay reader Pete Harper about Funding Circle.

Pete Harper, 4thWay user:

How do you all feel about Funding Circle and their bad debts these days?

I decided about 6 months ago to pull out of FC because of what seemed to be the increasing number of loans that were going bad, on top of a few other reasons but mainly the bad debts.

Maybe it's just because of the volume of loans they issue and therefore it seems like a lot going bad. Sometimes I think they hide bad debts because they're being paid by the guarantors or some other explanation and therefore still marked ‘live' but as far as I'm concerned, anything that can't be sold on is bad.

So as I say I've taken as much of my money out as I can. I've been looking this morning at what is left to see when I might expect the last few dregs of cash back. There's a couple that I'm invested in that I'd like to draw your attention to and would love to hear your thoughts on the matter.

Borrower 1 – name removed for privacy reasons

They seemed quite pleased with themselves that payments would increase to £250 per month. Given that the original loan repayments were due to be nearly £4,000 per month, it doesn't take a genius to calculate it would take over a year to pay off one month of the outstanding debt and therefore over 11 years to pay the total outstanding.

I emailed them the day after this comment was posted and seemed to be quite happy with the arrangement and the fact this was double what the guarantor was previously paying.

Borrower 2

This loan makes the previous one mentioned look like a doddle in comparison. I invested a whole £20 in this loan through the Autobid when it was issued in July 2014. If I'm lucky, I'm receiving 3p per month at the moment. This works out to the loan being repaid, if they don't miss a month, in about 50 years.

Now don't get me wrong, I know the risks with P2P. But 50 bloody years to pay off the loans?! Probably with no interest?! I'm 38, am I going to see this money?!! Across the three loans to this battery company the debt is barely £150k – can they not be forced to sell their house or something?

I'm not an experienced investor and I know even less about debt recovery, business or domestic. But things like ‘Can't Pay We'll Take It Away' on constant repeat on some TV channels makes me think there's a hell of a lot more that Funding Circle could be doing here to recover this debt.

Also, with the repeated comments from folks like yourselves saying that many P2P investment companies do not make a profit, it makes me wonder if Funding Circle are even going to be around in 50 years time to still be bunging me my 3p a month.

4thWay's response:

In short, I think Funding Circle is a strong P2P lending platform. It does good quality loans, it has a good bad-debt recovery record (compared to typical small business lenders) and it charges sensible interest rates for the risks involved.

You're not the first Funding Circle lender to ask 4thWay about unsatisfactory results. With a huge platform like Funding Circle, which has tens of thousands of lenders, it is not a surprise to me that some lenders are disappointed with results. Due to random chance, it is probably mathematically impossible that all lenders achieved great results.

Most lenders with poor results will not have taken the step to spread their money across lots of loans. (Funding Circle has to take some of the blame for this, since some lenders lending smaller amounts didn't realise their money wasn't being diversified widely.)

However, some other lenders will have diversified pretty well but had bad luck, under-performing the average. That said, I believe the vast majority of lenders who spread their money across hundreds of Funding Circle loans, and hold them till they are all repaid, will continue to do just fine.

(To see how that spread of results occurs, please see the example graphic at the bottom of this page.)

After a lot of probing, I don't think any of us at 4thWay have had any cause to suspect that Funding Circle is hiding bad debts, although I think that it could perhaps be more open about any mistakes it has made and what it will do to ensure those mistakes don't occur again.

The data Funding Circle supplies is very comprehensive and none of us have seen or been told anything suspicious about it that makes us think it is editing its information to make it look better.

The two bad loans you've singled out are not unusual for any bank, business loans P2P lending site, or other business lender. Funding Circle ultimately recovers around 40% of bad debts on average. That would be a poor recovery record for property loans but is good for unsecured business loans. (Guarantors don't count as security, because it is a weak and unreliable protection for lenders.) A lot of bad business debts, unfortunately, remain largely or entirely unpaid, and that is entirely normal.

The relatively low recovery on bad debts for small business loans is part of the reason why you need to spread your money across lots of loans and charge higher interest rates than for e.g. buy-to-let mortgages. Funding Circle offers both of those things, if you lend around £4,000 or more, which should lead to enough automated diversification for most lenders.

I don't know if Funding Circle will be around in 50 years, but the risks to lenders of losing money due to a P2P lending site collapsing are small compared to other risks, such as the risk that too many borrowers can't meet repayments. (See The 13 Key Peer-To-Peer Lending Risks Risks.)

Also, Funding Circle's financial situation currently gives me no cause for concern.

Just so you know, 4thWay doesn't receive any commission from Funding Circle. (Although we would not be influenced if we did. We take huge steps to ensure we protect our independence, since that is by far our strongest selling point for our website users and readers.)

Read more on Funding CircleCrowd2Fund Versus Funding Circle: Which Is Better?

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