Funding Circle Review
Interest rates worry me, and it's become too difficult for lenders and analysts to assess its current performance.
When did Funding Circle start?
Funding Circle has completed £5.4 billion in loans to UK-based businesses, with billions more in other countries, stretching back to 2010.
What interesting or unique points does Funding Circle have?
Funding Circle does loans usually between £5,000 and £400,000 for up to five years to small- and medium-sized businesses. The ultra-low risks that you often find in smaller, more nimble P2P lending sites are long gone here, but in its place there are more stable, long-term sustainable, results. This comes from its massive loan book, which currently generates £1.5 billion in new loans per year. Funding Circle is the only UK P2P lending site listed on the stock market.
How good are its loans?
Funding Circle still has good quality loans, but it no longer provides enough information for us to assess them; for example, so that we can see the spread between risky and less risky loans that lenders can have allocated to them.
Its standards remain high: average business borrowers have been trading for nine years, have sales of £800,000 and six employees. There is also a good geographic spread of loans across the UK's four nations and ten regions, which could help to keep bad debts smooth if a region starts suffering greater problems.
Funding Circle has proven itself to be good at recovering bad debt. Up until around 2018, 4thWay had calculated it was ultimately getting back around 40% of any troublesome debt, which is a great result for these kinds of business loans, which usually have no hard property that can be easily repossessed and sold to cover losses. We are unable to update that figure due to reduced information from Funding Circle, but I think it's more likely than not that its recoveries remain impressive.
How much experience do Funding Circle's key people have?
Funding Circle proved long ago that it has a very large, highly experienced, fully-rounded team that easily competes with any bank. They have skilled in-house former bankers,, credit-risk experts and bad-debt collections personnel. It's a complete lending operation.
Funding Circle review: lending processes
Funding Circle has historically shown itself to be excellent at evaluating borrowers and learning from the large amount of data it has collected on tens of thousands of them. Its processes are complete and highly satisfactory when it comes to assessing borrowers and taking action against bad debts.
How good are Funding Circle's interest rates, bad debts and margin of safety?
Funding Circle has previously demonstrated that it understands and contains the risks when approving loans, and it has historically priced interest rates well. Since it now inexplicably gives us a lot less information, which is quite worrying, I am not at all confident it offers a large margin of safety, especially in the event of a recession.
From the limited figures Funding Circle does still provide, the average returns in any annual crop of loans has remained distinctly positive. The worst projected returns in recent years have come from loans that went live in 2017. Funding Circle projects that lenders in those loans will still, on average, make around 4% to 5% after fees and bad debts. In recent years, 4% to 6% seems to be the norm.
Interest rates before deducting fees and before bad debts have stayed very steady since 2012, being between 9% and 10% each year. This is surprising, because we know that Funding Circle has gradually allowed more riskier borrowers onto its platform. It all suggests that lending interest rates before deducting bad debts have continued to fall, which is what I'd expect to happen as a P2P lending site matures – up to a point. The lower rates fall, the greater the risk of losing money to bad debts.
At least partly due to a riskier average lending profile, bad debts have risen. Projections for final, bad debts – based on the total pound amount of bad debts, have recently gone from 2% per year to around 3.1%-4.6% over the past few years. This is still reasonable for these sorts of loans.
However, interest rates have sunk pretty low at the same time that Funding Circle has stopped supplying data to assess the risk-reward balance. With no further information coming from them, I would presume that a good chunk of lenders will be disappointed at the moment with their returns, especially those with below-average results. I also think that, with these interest rates on these kinds of loans, lenders could easily expect to lose money during a recession.
Has Funding Circle provided enough information to assess the risks?
Funding Circle used to enjoy praise from 4thWay for its openness in sharing details about its business, which used to include “sharing the fine detailed history of each loan over time”. With that level of detail, we were able to assess its performance using both bank-risk modelling and investing techniques.
However, Funding Circle withdrew this information in spring 2018, In many ways, withdrawing data that it used to provide causes me more suspicion than if it never provided the data in the first place.
Funding Circle does not enable individual lenders or independent analysts that it hasn't partnered with, such as 4thWay, to confirm its results. Without details, we are unable to see trends, hidden issues with loans, changes in the types of loans it is approving, what mix of lower-risk and higher-risk loans are being offered to lenders, and how much interest rates are being compressed while the risk profile rises. Among other things.
Of particular interest to me would be if it provided us with enough information to be able estimate how variable individual lenders' results are, and what lenders might expect in a severe recession using the internationally recognised Basel.
Without more data, Funding Circle is no longer able to earnor on its lending accounts.
Is Funding Circle profitable?
Funding Circle has been losing money, but I have no doubt at all that it could be profitable as soon as it wanted, if it chose to stop growing and cut costs.
Lenders might be worried about a dramatic plunge in its share price after its recent flotation on the stock market. However, this has nothing to do with the underlying soundness of its business, and more to do with the hype and high price that typically goes with a “FinTech” business selling shares for the first time on the stock market. Funding Circle is here to stay.
What is Funding Circle's minimum lending amount and how many loans can I lend in?
If you lend at least £2,000, you will lend across at least 200 borrowers, which is appropriate for these loans.
Does Funding Circle have an?
Funding Circle's lending accounts are available as.
What more do I need to know?
It is not uncommon in these kinds of loans for a significant minority of lenders to see their lending returns take a hit at the beginning due to early bad debts. But, over time, the interest you earn and the recoveries on bad debts will improve the results.
Recently, lenders have complained that they are unable to sell loans early. If this is a problem across Funding Circle, I suspect the reason is that lenders who are disappointed with below-average rates are trying to sell, and there are not enough buyers.
Visit Funding Circle.
Funding Circle: key details of its Conservative Lending Account
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Interest rate after bad debt
Here we show the P2P lending site's own estimate
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Funding Circle Quick Expert Review: interest rates worry me, and it's become too difficult for lenders and analysts to assess its performance
Funding Circle has completed £5.4 billion in loans to UK-based businesses, with…Read the full review here
Independent opinion: the opinions expressed are those of the author and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.
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