Crowd2Fund Loan Book Published, Sheds New Light
Crowd2Fund*, the business loans P2P lending site, has now started to publish its full loan book with detailed information about every loan that has been made through its website.
It's fair to say I now understand Crowd2Fund far better than I did just two weeks ago.
You can see the Crowd2Fund loan book for yourself here, but here's my take, ending with my updated candid opinion of Crowd2Fund as a lending opportunity.
New light on Crowd2Fund's late and bad debts
It's not really possible at this early stage to do precise measurements. Crowd2Fund has completed 284 loans, most of which still have years to run.
However, Crowd2Fund's loan book provides a huge wealth of broader information that 4thWay previously didn't have, especially regarding the performance of the loans.
One of the notable features that it reveals is that many loans are “in arrangement”. This means that the borrower has been allowed to change the terms of the loan after agreeing terms and lenders have lent their money.
Usually, this is only allowed because a borrower is unable to meet the monthly payments it signed up to initially. Such loans are typically called restructured loans or simply renegotiated loans.
The most prominent association of P2P lending sites, the P2PFA, classifies all renegotiated loans in the same class as its late loans. I think previously it was more strict, classing restructured loans as bad debts.
4thWay's own experts class renegotiated loans as bad or late, depending on the type of analysis they are doing.
Our experts' standard modelling is their most conservative; they lumps all late, restructured and bad debts together into one pot, along with any loans that were in default and are now repaying. They simply call all those loans “bad”.
Following their example, I see that Crowd2Fund has 35/284 loans that are bad (taking a late date of 60 days like the P2PFA does). This gives a combined late-and-default rate of 12.32%, which is high but still manageable with decent interest rates.
Crowd2Fund can improve those results by ensuring that restructured loans are ultimately repaid in full, with interest, and by ensuring that a good proportion of late and bad loans are similarly repaid.
If Crowd2Fund had a 4thWay PLUS Rating or Risk Score
4thWay's ratings and scores look at late and bad loans, conducting strict banking-style calculations on them to see how loans might perform in different recessions.
Crowd2Fund probably has enough history now to meet the minimum criteria that 4thWay's risk modellers have set for being assessed for a rating, although it will be a long time before it has enough history to remove all the strong penalties that are added to the scoring system.
Since our team hasn't carried out a rating assessment on them yet, let's just pretend for a second that Crowd2Fund's results continue exactly the same way for years across hundreds more loans. What sort of 4thWay PLUS Rating or 4thWay Risk Scores would it earn – or would it fail to earn them?
Based on the current figures, if Crowd2Fund maintains its current record for a long enough period of time over many more loans, 4thWay's modellers tell me they think they would classify its defaults as “high” and full calculations would probably put the 4thWay Risk Score in the region of 7/10 or 8/10. (1/10 reflects the lowest risk and 10/10 the highest.)
That means that, by a very conservative measure, losses in a severe recession could potentially reach 20% or so, before taking into account any interest that lenders earn to offset losses.
That isn't 20% losses per year, but one-off losses across the life of the loans, so you would earn interest every year (not one-off) to offset that.
With interest rates just shy of 10%, the average lender might survive a minor recession thanks to recoveries and interest earned, giving a 4thWay PLUS Rating – our measure of risk and reward – of one or two out of three PLUSes. (Three PLUSes is best and if a P2P lending site achieves any PLUS Rating at all it is good.)
Those are probably worst-case results, with Crowd2Fund now having the opportunity to show it can do better over the coming years.
How the Crowd2Fund loan book compares to Funding Circle
It's still early days, but let's take a look at Crowd2Fund's largest competitor: Funding Circle.
Crowd2Fund's proportion of late and bad loans is loosely equivalent to Funding Circle C-grade loans – at least up to the point that Funding Circle stopped publishing its loan book in spring this year.
Up until that point, Funding Circle had a well-proven track record of ultimately recovering around 40% of bad debts, which is good for mostly unsecured business loans.
4thWay's bank risk modellers assume just 20% recoveries on loans like these until there is a very large record demonstrating otherwise.
On the reward side, lenders who like to lend a similar ammount of money in lots of loans will be experiencing interest rates of 9.97% at Crowd2Fund, before losses
With Funding Circle C-grade loans, they will have been receiving 12.4% before losses, meaning a substantially better balance of risk and reward.
Can Crowd2Fund improve as Funding Circle did?
Given time, though, you can usually expect results to get better.
Based on our earliest records of Funding Circle, its late-and-default rate on its first 284 loans was far higher than Crowd2Fund's at a whopping 17.96%.
And those loans paid just 7.23% interest before losses, so the balance was far lower than Crowd2Fund's at the same time in its life.
Funding Circle classified its first 284 loans as A+, A or B grade. Funding Circle did not launch its C-grade loans until several years later.
So, on that crude measure, Crowd2Fund's loan book has started much better than Funding Circle's did. It seems likely that this is in part because Crowd2Fund does not automate as many aspects of its analysis of the borrowers.
Perhaps for the same reason, Crowd2Fund unfortunately approves new loans at a vastly slower rate than Funding Circle did when it started. It could take years before 4thWay's experts can measure performance mathematically without adding a lot of penalties to their calculations.
A wide spread of results
In normal times, if you spread across 100 Crowd2Fund loans (the more the better), the current early results indicate that you've got around a 20% chance of seeing 15 out of 100 loans either falling 90 days late, being put in arrangement, going bad or being written off.
Of course, you can expect some loan repayments and interest payments to be made before loans go wrong. You can also can expect recoveries on some of the bad loans and that some late loans will get back on track. So the actual amount you lose before interest would be far less than the full amount on those 15 loans.
On the flipside, around 20% of lenders will see less than 10 loans out of 100 suffer any lateness or other problems, which is highly satisfactory.
Note that Crowd2Fund itself classifies just six loans out of 284 as bad or written off, as opposed to late or in arrangement.
Chris Hancock, Crowd2Fund's CEO, says that the worst case is that just 33 out of around 2,000 Crowd2Fund lenders might currently end up with losses, due to not spreading their money around enough. If all those bad loans are written off, lenders will still earn 6.47% interest on average, which is a satisfactory return for these kinds of loans.
Interest earned so far
Crowd2Fund‘s* lenders have already earned around £1.25 million in interest.
In another 12 months' time, lenders will probably have earned as much in interest as the entire value of all the loans that are are late by 90 days, in arrangement, are bad or were bad combined.
Therefore it seems incredibly unlikely that lenders in the existing loans will lose money overall.
Where next for Crowd2Fund?
I want to see Crowd2Fund reveal how many loans are by the same borrowers.
Taking Funding Circle as an example, out of Funding Circle's first 284 loans, 120 of them were related to other Funding Circle loans.
You need to ensure you are lending not just across lots of loans but lots of borrowers. If you decide to choose Crowd2Fund loans for yourself, rather than auto-lend, you can select loans so that you don't lend to the same borrower twice.
My opinion on Crowd2Fund for lenders
Crowd2Fund is not in my top ten P2P lending sites, but I am watching it with interest and like its potential for diversifying.
The Crowd2Fund loan book reveals a lot more loans that have less-than-perfect records than any of us at 4thWay could have realised previously.
And, since Crowd2Fund does small, unsecured business loans, it still needs a lot more time till we can see how its performance pans out across hundreds or thousands more loans.
I think if you want to use Crowd2Fund you should lend no more than 0.25% to 0.5% of your entire pot to any one borrower and no more than 5%-10% of your lending pot in total.
It is totally okay to lend to just a handful of borrowers, provided you lend small amounts and provided you are diversifying across many loans or investments across your entire investment and lending pot. Because:
It is your overall P2P lending results that count, not the result at an individual P2P lending site, which can be impacted by bad luck.
There are very few P2P lending sites offering loans like this and I think lenders should certainly include some in their mix.
Also, Crowd2Fund offers a somewhat different kind of business borrower to anyone else, which is attractive for diversifying. Although it is not essential for most lenders to have borrowers like this in their pot, they can add some additional diversity to further lower the risk of making an overall loss across all your loans.
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