June 3, 2012
In July last year I opened a Funding
Circle account. It is a P2P
where people can lend money to British businesses. The idea is that a
business asks for a loan along with company details and usually a
director guarantee (so the director is personally responsible if the
company defaults). The site’s members then participate in a reverse
auction to fund part of
the loan in amounts down to £20. Funding Circle advertise that their
members receive a 8.5% gross return on average. Below are notes on my
experience of the site.
Over the last 6 months I have managed 8.8% gross return, but that is a
7.8% return after fees and before losses. Funding Circle may quote their
statistics excluding fees, but I think it more realistic to include
them. After losses (loans to now bankrupt firms) the return is 5.1%
before taxes. Not huge, but a great deal more than any bank offers.
Plus, Funding Circle is pursuing recovery of the losses through the
director guarantees, so the return may yet rise. Occasionally there are
also bonuses for certain types of lending, but I didn’t qualify for any
over the last half year.
The above graph is what an auction normally looks like in terms of the
interest rate paid by the company (and received by the bidders) while
the auction is open. The roughness of the graph can be taken as a
indication of is anecdotal and inaccurate nature. Funding Circle
auctions take a fortnight. The auction starts at point A and people
starting making bids, after a period of time the bid amount exceeds the
requested amount of money (point B). I haven’t seen any auctions fail by
not having enough money bid (although they have because the interest
rate is too high). From point B any new bids have to be better than the
current worst bid, so the interest rate offered drops. This is a slow
process until the a few days before the auction closes (point C), when
the bidding rate rapidly increases. The final couple of hours can see
the interest rate drop significantly as thousands of point are bid up to
the auction close (point D).
The factors affecting loans appear to be the following.
- Although the company requesting a loan can take the money offered at
the current rate at any point after the loan has been filled (point
B), they are guaranteed to get the best rate by waiting until it
closes. Despite this some firms still close the auction early. Thus
it can sometimes be worthwhile putting in a cheeky high offer on an
auction to catch these suboptimal early closures.
- The main factor affecting auctions is the amount of liquidity on the
site. Small auctions under £30K are usually filled within hours and
then continue to drop. £100K auctions often only fill a few days
before the end. I have seen £16K C rated auctions go for a lower
rate than a £55K A rated auction. This is just because there is a
set amount of unthinking money chasing each auction, so the
competition is much greater the less money is requested. I haven’t
successfully bid in any auction under £40K in the last 6 months, the
rates offered are just too low.
- Credit rating is the next largest factor in offered rate. Funding
circle uses professional credit rating firms and allows A, A, B and C rated firms to request loans. The
credit rating is supposed to correspond to the likelihood of
bankruptcy, and this seems to be roughly the case according to
Funding Circle’s loan statistics. Although it doesn’t help me much
when the only bad debt I have experienced also happens to be Funding
Circle’s only A rated bankruptcy.
- After loan size and credit rating various little issues come into
play. Do people like the industry? Does the company answer questions
(good) or want to stay anonymous (bad)? What are the accounts like?
The other things I look for are:
- A profitable company.
- Paying tax. Small companies should be paying 21% tax on profits,
larger companies are closer to 30%. If the tax paid is much
lower without a good reason (for example a company with research
write offs), that raises alarm bells with me.
- Positive working
capital - it is
good to know that if the firm suffers a short crunch they can
- Profit retention. What does the company do with its profit -
Reinvest or pay out shareholders? If the loan amount is high
compared to retained profit and in recent years the company has
been drained then I check everything else more carefully.
- Financial stress - how many other loans does the company have.
- How late do they pay their bills. Some companies are perennially
late. A few days is ok, but more than that and I’m concerned.
If Funding Circle sounds interesting and you know me, drop me an email
and I’ll give you a referral. They often have a little bonus for both
referrer and referee.