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What We Learned From Kuflink’s First Profitable Accounts
Kuflink* has just reported its first ever profit of about £400,000, off the back of real earnings of about £3 million, for 2021. This is the first profit for the group since it launched its P2P lending arm, after results previously improved from a £3 million loss in 2019 to a loss of just £100,000 in 2020.
Kuflink now expects to remain profitable as it escapes from its startup phase.
Why has Kuflink put out accounts again so soon?
You might have a little déjà vu, as it was just three or four months ago that we wrote about Kuflink publishing its accounts for 2020. Those accounts were late, however. That's why it's accounts filed at the companies registrar for 2021 follow right on their heels this month.
Kuflink's accounts from all the companies in the group are more detailed than most P2P lending companies, so they're always worth picking apart. Here's a summary of the most interesting bits, after getting more details from Kuflink.
It continues to lend 5% in most loans – with a small change
Kuflink lends in the same loans as lenders using its online platform and it takes the first loss on its stake.
The accounts are unclear on the amount of lending that it does at first loss. Kuflink* has now confirmed to us that it's lending 5% in most of the outstanding loans.
Perhaps due to its growing loan book, it says it no longer commits to lend in quite as many loans as it used to, although it's still going to continue to put a lot of money where it's mouth is.
At a minimum, it will now lend 5% in all Select Invest loans that are secured on loans that are at least 65% of the property valuation, or 65% of the property's expected sale value when it comes to development loans.
During the pandemic, staff numbers fell from 43 to 31.
Quite a lot of loans extended and re-extended after the pandemic started. Kulflink's accounts and further discussion with Kuflink shows that this was caused by stretched supply chains from the pandemic and a home-improvement boom – using up construction supplies – during lockdowns.
Construction was put on hold and some loans were extended based on COVID-19 forbearance from the FCA. However, Kuflink believes the number of loans needing extensions has reduced dramatically, and I look forward to seeing this impact in the monthly data submissions it sends to 4thWay.
Directors borrowing from platform lenders
We've mentioned before how directors of the company took out huge loans through the online lending platform. I'm not happy they did this, although it's pretty common in P2P. Their borrowing is now reduced to £4.2 million from auto-invest lenders, down from £5.3 million.
I'd like to see the director's repay platform borrowings as swiftly as possible.
On top of that, around £1 million has been borrowed by directors or related parties from the Kuflink group of companies itself, i.e. company money was borrowed, not platform lender money.
Despite all this, I see no issues at this stage.
Directors have guaranteed over £2 million to cover losses on “certain loans”, which it tells us are legacy loans and they won't be approving such loans again.
The loan book is getting more balanced
As its data has already shown us, Kuflink's accounts report that the largest loan is now worth just 5% of the outstanding loan book. Most loans are much smaller than that. This is about half as large as the biggest loan used to be, so this is good news from the perspective of spreading risk.
Looking for clues in default interest
Kuflink earns the default interest itself, if a borrower is late in making payments. It doesn't pay it out to individual lenders.
We keep an eye on it when P2P lending companies are keeping default interest for themselves, because it's important to know that it's not dragging out bad debts to earn fat default fees from borrowers. That would increases the risk the loan won't be repaid in full and it delays repayment to lenders.
Looking at Kuflink's case, the default interest is a sufficiently small part of its overall income that I'm not concerned. At £600,00 of default interest, this is around 20% of Kuflink's overall real income.
Pure P2P lending
If you're familiar with accounts and have tried to read them, you'll have noticed that all the lending that is done through Kuflink's online lending platform is reported in Kuflink's accounts. This gives the misleading impression that Kuflink is doing the lending, not individual lenders.
This is a technicality and a quirk of the accounting rules. Because Kuflink lends 5% in many loans, it's required to report all loans as if they are its own assets, even though this isn't the case. Rest assured, Kuflink is genuine P2P lending, where you are lending directly to the end borrower.
In other words, if Kuflink went out of business owing a load of money to Barclays Bank, Barclays can't step in and say it's taking your repayments from you.
Auditor and governance issues are behind it
This is now the second filed accounts where Kuflink is given a clean bill of health from its auditors, since its previous auditors were very critical about some of its processes. Having discussed the changes Kuflink has made in detail, the case is strong that those issues are now behind it.
We've just reviewed a score of P2P lending companies' results and updated Which P2P Lending Sites Are Profitable?
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