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Funding Circle Expansion Loans Are Lower Risk

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By on 6 September, 2015 | Read more by this author

When you look deep into the detail of Funding Circle's* loans, you get some interesting patterns.

Today, I compared the two biggest types of loans: “expansion/growth capital” versus “working capital” loans to see how they compare on both bad debts and interest rates.

Is one riskier than the other and is the interest rate higher to compensate? The answers are surprising and (to me anyway) delightful.

So the theory goes

You would imagine that companies looking to expand probably aren't usually businesses that are worried about their finances right now. Whereas those looking for money just to keep things running – “working capital” – might potentially have more issues.

The figures are supportive of this hypothesis.

Not only do the A+ and A loans have a lower proportion of working capital loans compared to expansion loans, but bad debts are also higher for for expansion/growth capital loans across every borrower grade.

You're not rewarded for taking bigger risks

You might think that's fine so long as you receive higher interest rates for lending in working capital loans, but that's not really what's happening.

Firstly, let's compare the bad debts and interest rates on Funding Circle's incredibly high quality A+ loans, split by each loan type: expansion or working capital.

Then we'll look at all borrower grades together, not just A+, but again split between the two loan types.

A+ loans: interest rates and bad debts

Under 0.8% of all A+ expansion loans have gone bad and if you split your money roughly equally between your loans that would have earned you 6.86% before bad debts.

Approaching 1.2% of all A+ working capital loans have gone bad – that's around 0.4 percentage points more loans going bad – but you have just made a measly 0.06 percentage points more interest at 6.92% before bad debts.

With interest rates virtually identical, you could well have earned less with the working capital loans after deducting your bad debts.

Note that both of these records are still fantastic. Funding Circle* A+ borrowers have very low bad debt rates across the board.

It's just that if you have the time to select just expansion loans you can lower your risk even further while actually potentially boosting your interest rate a little after bad debts.

All grades: interest rates and bad debts

Under 3% of all expansion loans have gone bad if you spread your money evenly across all borrower grades. You should have earned 9.2% before bad debts.

In contrast, nearly 4.2% of all working capital loans have gone bad – that's 1.2 percentage points more loans going bad – but, again, you have just made an insignificant 0.06 percentage points more interest at 9.26% before bad debts.

The difference could be starker in a recession

The difference might be more pronounced in a recession.

While both types of loans will see greater bad debts, you might well see that bad debts on the higher risk loans – by which I mean working capital loans – will climb further and faster.

So if you have time you might aim for more expansion loans over working capital types.

Read more on getting higher rates with lower risk in Funding Circle Lending Strategy.

Visit Funding Circle*.

Interest rates in this article are based on rates so far in 2015 and are after fees. Bad debt figures are based on all loans ever matched by Funding Circle. In addition, I excluded borrower grade E from the analysis because that borrower grade is too new, using grades A+ to D.

*Commission and impartial research: our service is free to you. We already show dozens of P2P lending companies in our accurate comparison tables and we keep adding more as soon as they provide us with enough details. We receive compensation from Funding Circle, and other P2P lending companies not mentioned above when you click through from our website and open accounts with them. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

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