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This article covers: What is unsecured small business lending? When do small business loan bad debts occur? How and when do these loans make a profit? What do individual lenders need to do to reach a profit? How much does platform ability, borrower quality and…
LendingCrowd’s Growth Account is unrated, due to lack of information. These loans have been paying lenders interest after bad debts. Visit LendingCrowd* or keep reading the LendingCrowd Review.
LendingCrowd started in 2014 and has now done £190 million in loans.
LendingCrowd is the only peer-to-peer lending website to focus on lending to small businesses in Scotland and it is the only unsecured business lending site that allows you to choose individual loans for yourself, if you want to.
LendingCrowd paused new lending in order to offer borrowers Coronavirus Business Interruption Loan Scheme loans. These are government-backed loans that cannot be funded as P2P loans.
Now, new lenders are currently unable to sign up and existing lenders can’t add more cash to their accounts. LendingCrowd states that new P2P loans are still rare at this time.
LendingCrowd doesn’t provide enough information to see the impact of COVID-19 on existing loans or to project the future impact.
LendingCrowd’s early results in terms of late loans and bad debts were in line with typical small business lending and seemed good. But, due to less information, we are unable to track its progress, as this P2P lending company needs more time to mature.
I believe the key people behind LendingCrowd have quite a lot of directly relevant experience in the area of approving small business loans. The team is substantial when you consider LendingCrowd’s relatively small size and it appears to compare well to similar P2P lending companies.
The relatively new lead decision maker has relevant experience in managing the risks of business loans. Although this wasn’t at the highest level and doesn’t span multiple decades, I think it’s sufficient for a competent person with this level of experience, when managing risks at a smaller, agile business of LendingCrowd’s size.
LendingCrowd also has an in-house solicitor with relevant experience, which is also unusual for a P2P lending business of this size.
Overall, there is a great deal of useful experience at LendingCrowd.
LendingCrowd evaluates each borrower in a very individual way. This means that it can find good opportunities that more automated lenders miss, but it can also increase the risks.
I am pleased to see that a major focus in selecting business borrowers is to try to ensure that borrowers have plenty of cash coming in to cover the loan repayments, which is highly appropriate for these kinds of loans.
Specifically, businesses borrowing through LendingCrowd can typically cover the monthly loan repayments at least 1.5 times over – and a lot more for its A+ loans.
We haven’t been updated for a while on its processes, but it has built on a stable foundation that considers the management’s ability, credit and ID checks, an analysis of the industry, and existing borrowing levels.
It also evaluates any security that the borrowers provide for lenders, although at 4thWay we treat the loans as unsecured, because LendingCrowd hasn’t proven to us that its soft security improves results. Unsecured business lending is a good form of lending though, providing the borrowers are paying interest rates that cover the risks.
We know that LendingCrowd conducts at least some of the risk modelling that we really like to see for business loans.
LendingCrowd* recently took the very dramatic decision of removing its performance and bad-debt statistics from its website, dropping its detailed loan-book data from the public, and removing access to that data by 4thWay and other analysts, too.
4thWay has always recommended healthy cynicism as lenders’ starting point when P2P lending companies take such steps, which goes against the trend of increasing transparency in the industry.
In these cases, it’s up to the P2P lending companies to demonstrate that lenders can drop their cynicism. LendingCrowd doesn’t do this, in my opinion. Certainly, it no longer provides enough information for 4thWay to do any meaningful analysis of the risks and rewards.
The information LendingCrowd now provides the public with on its performance and expectations is limited mostly to a few paragraphs and a couple of tables in its outcomes statement.
The financial regulator requires that P2P lending companies publish outcomes statements within four months of the end of the calendar year. In some cases, four months is going to be too late. More importantly, once a year often isn’t going to be adequate. I don’t consider it adequate at this time, in the middle of a pandemic, and possibly it’s not adequate for LendingCrowd at any time.
Although we now rely almost exclusively on LendingCrowd’s outcomes statement to assess its results, it’s not very informative.
Its 2020 statement compares expected default rates to actual default rates, without explaining if either of these rates are adjusted based on the maturity of the outstanding loans.
The statement also doesn’t satisfactorily define what it means by “default rate”, which is a phrase that is not used consistently across all banks, P2P lending companies, and even apparently different divisions of the FCA.
It doesn’t explain whether the expected default rate was its initial expectation or an updated expectation.
It has no information about the impact of COVID-19 or the potential impact as government support is removed.
The actual returns it publishes on its auto-lend accounts look promising and are a small highlight. However, LendingCrowd provides insufficient information to assess how the actual returns calculation is calculated. In particular, how much allowance does it make for late or defaulted loans that may not be recovered in full, and how reasonable is this on a historical basis?
I can no longer find any estimate of the returns made by lenders using LendingCrowd’s self-select account and we haven’t received them direct from LendingCrowd. A pretty bizarre omission.
It’s good to see that independent specialists verify their calculations, but that doesn’t mean those specialists – who will have been paid by LendingCrowd – had a great deal of say in ensuring that the figures in the outcomes statement overall show what we would hope it shows. And they don’t help us to define what LendingCrowd means.
LendingCrowd doesn’t even provide summary information of the key people at LendingCrowd on its website’s About Us section for the public to see.
I’d like to remind you of principle three of 4thWay’s 10 P2P Investing Principles:
“Treat buried information as if there’s a reason, missing or ambiguous information as if it contains bad news, and decreased information as if it contains worse news. Demand more verifiable information the less that is provided freely.”
LendingCrowd is not yet profitable, but, in early 2019, LendingCrowd received £6 million in investment and it received £1.6 million in early 2020, up from an initial investment of £2 million in 2018.
For these kinds of business loans, you normally need to lend in around 180 or more loans to contain the risks.
LendingCrowd is approving few new P2P loans at the moment. In more normal times, it was approving around 20 loans a month, so you could build a decent loan portfolio by dripping your money in over a year or by re-lending the monthly repayments in new loans.
The minimum you can lend is £20 if you choose loans yourself, meaning you need to lend perhaps £3,600 to spread the risks across 180 loans.
If you use automated lending accounts, the minimum you can lend is £1,000, which you can expect to be spread across just 50 loans to begin with, although this will rise rapidly, because you re-lend repayments you receive.
If you lend £2,000 in an automated account, you’re spread across 100+ loans, and for £5,000 you get 200+ loans.
LendingCrowd’s lending products are available as IFISAs.
Thank you for reading the LendingCrowd Review! Visit LendingCrowd* and read our IFISA Guide.
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 LendingCrowd and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or when you make an investment, 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.
