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How To Lend Through Crowd2Fund
Crowd2Fund does business loans and it is available in an IFISA (a tax-free P2P lending account) paying 8.5% or more before bad debts.
I'm going to show you one way to select individual business loans to lend in at Crowd2Fund for yourself, rather than relying on its auto-lend feature. I'm not saying that this way is the way, or the best way, it's just to educate you on Crowd2Fund and selecting business loans in general.
It would really help, if you want to select business loans yourself, if you took some time to learn something about how to read company accounts.
This article is not for beginners or those who want easy-to-use options.
Finding the opportunities
If you want to follow me as I do this, firstly you need to go to Crowd2Fund*. To see all the details of a lending opportunity, you are required to sign up.
Then click on “Opportunities”, hover over or tap the down filter arrow on the right, click/tap on “Loans” and then click/tap on “Apply filter”. You will now see what I currently see, which is a list of all the available ordinary business loans. (Crowd2Fund does other kinds of loans and investment products but they are all higher risk.)
Pick any of the loans and click/tap “View opportunity”. Now you can see all the loan opportunities that have been vetted and approved by Crowd2Fund's lending team.
Just for simplicity, ignore businesses that have multiple loans, called “tranches”.
Now your analysis begins.
Profit and loss
Scroll down to where it says Profit & Loss. My first move is to ignore all opportunities that don't show accounts for 2016 and 2015 at a minimum. If we're lucky it also shows 2014.
I quickly devised some simple rules that each Crowd2Fund opportunity has to pass on its profit and loss figures. Some of these are stricter than they would need to be on very established P2P lending sites, but Crowd2Fund's record is still small.
I did the following calculations:
- Gross profit divided by turnover in all years is at least 20%. (If it's too low it can mean it's in an incredibly competitive industry.)
- Admin expenses divided by gross profit is under 85% of gross profit.
- Admin expenses are consistent, being in a tight range every year, within 10 percentage points. For example, between 65% and 75% of gross profits in all years. (If admin expenses, such as staff costs, aren't consistent, it can also mean the business suffers intense competition.)
- Operating profit divided by turnover is approximately 15% in all years. Or more, obviously.
- Net profit divided by turnover is 10% or more in all years.
I got the feeling that Crowd2Fund businesses tend to be better at profit and loss and yet slightly weaker on the balance sheet than at other P2P lending sites. That's just an observation for now.
My balance-sheet rules are not as strict as the profit and loss ones; I'd even describe them a little bit as swinging. There is definitely room for rebalancing these. Stock investors in particular might notice the looseness of the some of these rules compared to what they might do.
Again, these rules need to be passed in all years:
- Current assets (which usually means cash in the bank or money owed now by customers) + pre-tax profits are higher than current liabilities (debts or outstanding invoices that are due to be paid soon).
- Fixed assets (e.g. property, computers, machines) + current assets (combined, they are the total assets) is greater than current liabilities. This is a way of measuring that the business is making money by using its assets.
- Current liabilities and long-term liabilities (the total debt) could be paid off in five years using pre-tax profits (in all years) or fixed assets + current assets is higher than the total debt.
Is the cash coming in?
We know that Crowd2Fund's main focus when accepting loan applications is cash flow, which means: is enough cash coming in regularly and on time to meet the monthly loan payments?
Ironically, however, Crowd2Fund doesn't show any figures on cash flow. The reason is going to be because the statistics they show come mostly from small company accounts, and small businesses tend not to include cash flow in their accounts.
I therefore shall assume that Crowd2fund* has this angle covered and move on.
You don't need to know everything
This is probably a good time for an interlude to talk about how much detail you need.
If you were a stock-market investor picking stocks (which I am too) it would be frightening to invest in a business without being able to read through full, detailed accounts, including cash-flow statements, preferably looking back over 5-10 years of accounts.
Lending to businesses is intrinsically lower risk and it is a lot more about a numbers game, so it is not essential to have the same level of understanding of the companies you lend to, provided you spread your money around or keep the amount you lend through a P2P site to a small proportion of your investing pot.
Other criteria not considered
Some loans are secured, which means that technically it is easier for Crowd2Fund to sell property and equipment and to recover bad debts.
Like most P2P business lending, it appears to be, as our chief risk modeller calls it, “naked security”. This means that there is no real sign that the assets have been valued and that they are really all that tangible. In these cases, therefore, we treat the loans as unsecured, because the security could provide next to no additional protection for lenders.
Borrower always wins
Crowd2Fund notes on some loans that the borrower will borrow your money even if it doesn't raise the full amount it was going for. This is odd in P2P lending. I would rather avoid such opportunities, but I fear that will leave us with no choice of loans at Crowd2Fund. No P2P site is perfect, I guess.
Crowd2Fund shows the incorporation date of the business, but a company can be incorporated in the year 2000, the owners do nothing for 15 years, and then they started trading two years ago. It just isn't informative enough for me at this stage.
What does that leave us?
Doing the above checks, I found one loan passing all criteria, Ashburton Cookery School. It pays lenders 8.5% interest, which is the lowest rate available and the only loan with that low rate. That's reassuring about Crowd2Fund's processes.
Assuming Crowd2Fund's growth continues and it is able to get more loans like that one, it could take you maybe 6-12 months to get your money lent in 10-15 similar loans. If we're talking about limiting our money to under 1% in each business loan, or even under 0.5%, that's approximately 10% of your money.
Since Crowd2Fund is so new and still untested, I personally wouldn't put more than 10% of my total investing pot into it.
It would be a real pleasure if you shared with us how you'd assess individual Crowd2Fund loans. You can sign up to C2F without opening an IFISA and take a look at the info it offers.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.
The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Crowd2Fund and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.