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LendingCrowd Earns A 4thWay PLUS Rating
As of today – the day we upgraded our ratings system – a new entrant to 4thWay's PLUS Ratings is LendingCrowd.
LendingCrowd* has completed over £34 million since 2014 in business loans and it offers an early exit if you are able to sell your loans on to other lenders. All of its lending accounts are available as IFISAs.
- ++ Rating (Excellent) on the LendingCrowd Self Select Account.
- 7/10 Risk Score on its Self Select Account. Lower is better. This is a fairly typical level of risk for the kinds of loans involved.
- Estimated interest rates after bad debts of 7%-8%, which looks to be satisfactory or better for the level of risk. (Plus cashback of £100-£500 before 29th June.)
The reason LendingCrowd has now earned a rating for the first time is that it recently achieved enough of a history for us to start assessing it for a rating.
Unlike some of its more secretive competitors, it also provides us with enough information to carry out the international banking stress tests known as the Basel tests. The 4thWay PLUS Ratings and 4thWay Risk Scores are based on those tests.
About LendingCrowd's borrowers
LendingCrowd mostly offers unsecured business loans. I think that everyone lending through either IFISAs or ordinary peer-to-peer lending accounts should diversify some of their lending into those kinds of loans.
The reason for that is that by lending across different types of loans you reach different kinds of borrowers, which gives you additional protection when some groups of borrowers do badly in a downturn.
Unsecured business borrowers could offer relatively few loans that run into delays and fewer loans that go bad compared to, say, property bridging loans, but they still offer higher interest rates than mortgages or personal loans.
Unsecured business borrowers as a group might generally have fewer saleable property and possessions when compared to secured business borrowers, who offer you security for your loan against the possibility of repossessing the things they own.
But, in compensation, unsecured business borrowers might typically have less debt elsewhere and might be generating more cash from sales. They often have lower fixed costs of doing business, making them more flexible to decrease spending in difficult times, and less reliant on constantly buying and maintaining plant and machinery.
Unsecured business lending is also often more honest, in a way. There are so-called “secured business” lending P2P sites, such as Rebuildingsociety*, where it is unclear just how secure their loans really are. In offerings like that, it often appears that the borrowers' security has not been properly valued and then segregated for P2P lenders to repossess and sell if need be.
Finally, unsecured business loans tend to be small. Contrast that with a handful of multi-million pound property bridging loans that could so easily mess up all the good results by going bad.
LendingCrowd's best features
Solid expectations in most recessions
LendingCrowd's ++ Rating on its Self Select Account is very solid, meaning that we expect across a lot of loans lenders on average should do just fine except perhaps in severe of recessions, and you can cope with recessions even better by re-lending the repayments and interest you receive.
This is roughly in line with the standard that long-standing big player RateSetter has set for itself, in terms of its ability to withstand recessions.
Diversifying into unsecured business lending
With a rating of ++ Rating, a legitimate question is Why do it when there are lots of +++ Rated P2P lending sites?
One reason is that you really have little choice when it comes to diversifying into unsecured business lending. There is relatively little competition in P2P lending for these kinds of loans. Crowd2Fund* and Funding Circle are LendingCrowd's main and pretty much only direct competitors.
And LendingCrowd is the only rated peer-to-peer lending site and IFISA provider to offer unsecured business loans.
With unsecured loans, LendingCrowd's team of former bankers can more easily check out the borrowers in an automated way than many other kinds of loans. This means checking bank statements and credit reports. LendingCrowd's record in loan selection has been solid enough to date.
Selecting your own loans
Another reason for doing so is that LendingCrowd* is pretty much your only choice of 4thWay PLUS Rated providers for selecting quality unsecured business loans yourself, which you can do through its Self Select Account or Self Select ISA.
Funding Circle certainly has the biggest history of the three main players here and it has had a very solid record in the past. But Funding Circle has removed the feature of manually selecting loans, much to the disappointment of active lenders who like to take full control of their lending portfolios. It also just stopped sharing its detailed data that allows a thorough assessment and a 4thWay rating. (Read more in Funding Circle Buries Its Data: Should Lenders Be Worried?)
I think LendingCrowd is therefore an attractive option for selecting individual loans. Especially when looking for businesses that have a lot of cash flow and low debts elsewhere.
LendingCrowd typically looks for businesses that are are bringing in enough money to cover the loan repayments one-and-a-half times over, and often the coverage is much higher than that.
Broad diversification achievable within half a year or so
LendingCrowd is currently approving around 20 loans a month, so the manual lending account won't offer you enough choice of loans for full diversification right off the bat. If you drip-feed your money in, you could build a large portfolio of loans within a year. You need to aim for around 200 loans, and certainly at least 100.
Whether you choose the manual or automated accounts, you can also spread your risk across more loans by lending less in LendingCrowd and more elsewhere. It is your overall portfolio of loans that is important, not whether you suffer bad or good luck at an individual platform.
LendingCrowd's weak points
Interest rates in the automated accounts are low
The interest rates on LendingCrowd's automated accounts – its Growth account and its Income account – might turn out to be fine once we have seen even more history, but personally I think they are on the low side for these sorts of loans. Plus, the interest rates are currently too low in its automated accounts to earn a rating.
The risk score is fair-to-middling
LendingCrowd's lending accounts have a 4thWay Risk Score of 7/10. 2/10 is the lowest that any P2P lending site can realistically expect to achieve and 10/10 is like the stock market in an extraordinarily bad year. So 7/10 is on the higher side.
While 7/10 is perfectly normal for these kinds of loans, what it means is that you need to spread your money widely to reduce the risks and you need decent interest rates – substantially more than savings accounts.
Do not be sucked into the idea that you can pick a mere handful of quality unsecured business loans and come out with great returns and no losses. A major branch of a successful lending strategy in unsecured loans is to accept the fact that your main defence against losses is to spread your money widely, so that odds switch greatly into your favour.
The bad-debt curve might unnerve inexperienced lenders
With unsecured business loans, it is typical that you suffer a number of bad debts early on – very shortly after a loan is approved. This is totally normal, but it can be unsettling for lenders who don't have a long-term strategy of waiting for the good loans to pay enough compensation and waiting for some recoveries on bad debts to dribble in over the following months and years.
Its rating is still punished
A shorter history means LendingCrowd's rating is punished further, so much so that it has earned 2 PLUSES rather than 3. It is on course for three PLUSes if it maintains its record while its history broadens and lengthens.
LendingCrowd hasn't yet been able to prove how much debt we can ultimately expect it to recover when a loan goes bad. Funding Circle ultimately has been recovering around 40%, given enough time to make the recoveries.
Based on our chief risk modeller's long experience of typical business bank lending, LendingCrowd should be able to manage around 20% recoveries with little trouble, but we don't know yet if it will do even better.
These recoveries aren't high, which is why the focus in unsecured lending is on picking businesses that won't go bad in the first place and charging enough interest for the risk involved, so that you can spread your money around.
The 4thWay PLUS Rating LendingCrowd has achieved assumes it will only recover 20%, and even less during a recession, so if it outperforms it could help push its PLUS Rating to three PLUSes (Exceptional).
Summary and main view
Overall, the Self Select Account and Self Select ISA from LendingCrowd* are good alternatives, or additions, to using Funding Circle, if you're looking for more diversification in unsecured business lending, and if you're looking for choosing loans yourself. But perhaps don't make it one of your big holdings till it has proved itself even more, and take steps to spread your money across lots of loans.
Other 4thWay articles and guides we linked to in this article:
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.
The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
*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, LendingCrowd, RateSetter and Rebuildingsociety, 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.