Funding Circle is one of the largest P2P lending platforms, having lent £1.8 billion to businesses since it launched in 2010. Like Zopa and Ratesetter, it’s perhaps viewed as one of the safer platforms due to its established track record and the amount of investment behind it. So far, it has raised over £100million in external funding and in January 2017 joined the “Unicorn” club: tech startups with a valuation of $1billion and above. Unlike Zopa and Ratesetter, it offers far more control over which loans you chose to fund and has a secondary market to trade existing loans.
Note: review first written August 2016, fully updated January 2017
Expected Returns: 7.1% historical return, 7.4% forecast.
Provision Fund: No
Sell Out: Secondary Market with Premium/Discounts
Minimum Investment: None
Cashback: £50 if you invest £1000. Need to register through referral email (request email here).
Speed of Investment: Fast & Easy. Lots of availability on Secondary Market and many new loans.
Funding Circle Review
Funding Circle prioritises its website and the performance of its IT infrastructure. Taking a look at their careers page:
We may work in the finance industry, but at our core we are a technology company that does finance. Our growth over the last five years has positioned us at the forefront of the fintech revolution. We need engineers who embrace the challenge of taking one of the world’s fastest growing companies and making them into one of the world’s biggest enterprises.
This focus gives Funding Circle a really polished and stable interface. I’ve used other small P2P platforms which just feel basic, sometimes buggy and don’t fill me with confidence. For me, Funding Circle almost feels like using Uber or Airbnb: very slick and well made.
They’ve had a lot of investment from external parties. recent funding rounds give it a $1bn+ valuation and the UK Government have invested £40 million via the British Business Bank. This is most noticeable when you bid for new loans, as the Government bank will supply the last 10% of every loan. (So, it’s not just through mainstream bond buying that the Government are pushing down rates!). I’m worried that this investment and the perception of Funding Circle as being a safer platform may mean that returns are lower. On the other hand, I think the platform has less risk of disappearing overnight than some of its smaller competitors.
The secondary market is good, with a wide variety of loan parts up for grabs, and allows you to set a premium or discount. This means that those looking to diversify on day 1 can buy into a wide set of loans from existing investors, some of which may be at a slight premium. It also means if you are desperate to withdraw, you can sell with a large discount to attract a quick buyer. To compare, many other P2P lending ‘hands-on’ platforms have a simplified secondary market. Websites like Money Thing or Collateral do not allow discounting, so while its nice and simple there may be huge selling queues for the less popular loans. Personally on these platforms if I notice a large selling queue building up I sell my loan part too: I know I can buy back instantly if I want but would have to wait to sell. Perhaps worse, the lending platform Saving Stream try to disincentivise this approach by not paying interest on loanparts for sale. So this puts in perspective the advantages of a secondary market allowing premium/discounts. Note that there is a 0.25% sales fee on the Funding Circle secondary market.
I invest in new loans or almost new loans on the secondary market. The following points are my personal thoughts and gut feelings (for the benefit of all I invite you to disagree in the comments below):
- Higher risk loans are better. Funding Circle take a 1% annual servicing fee, regardless of lending rate. So if I have an A+ loan originally paying 5% then I will lose 20% of my income in fees. If I have an E rated loan paying 20% then I just loose 5% of my income in fees. Also, Funding Circle only charge you the fees on the monthly loan repayment. So, if I have a £1000 portfolio of E rated loans and 20% go bad, I’ll pay less in fees than a £1000 portfolio of A+ rated loans where 2% go bad.
- Loans are ‘safer’ at the start. Directly after the business takes out the loan, you’d hope that they have all the money they need to do what they wanted. It is only later that the business may start to run into unexpected events or more cashflow problems. So, I don’t buy loanparts on the secondary market that are far into their term.
- Higher demand loans are better. If you have the time to do proper due diligence on every loan that’s great. If you are like me and want to make hundreds of small loans, then focus attention on the most coveted loans. In the ‘Loan Requests’ page you can view all the new upcoming requests, if there is a large £ amount loan that’s at 95%+ sold out at the bottom of the page (least time open), it’s worth looking at. Similarly in the secondary market ‘Loan Parts’ page, I focus on loans with less than 20 parts available. If 15 people are selling, they may just need money or want to diversify away. If there’s 300 people trying to sell out then maybe something is wrong. Following this strategy should also mean it’s easier to sell your loanpart on in the secondary market later if needs be.
- If you have the time, avoid the Auto Bid feature. If you value both your time and the lower risks of a diversified portfolio, you may not want to be reading through loanparts to buy at £20 a pop. My gut feeling with auto bid is that it may end up disproportionately buying the parts that no-one else wants, especially if you allow bidding on the secondary market loan parts.
- Cashback can boost returns to 12.55%. Based on the 7.2% forecast returns, a £1000 investment would be matched with a £50 cashback within 2 months. If you reinvest this too it should give you a return of over 12% after a year. (12.75% = 7.4% + 5% cashback + 10 months of 7.1% on the £50 cashback).
- Diversify in 1% chunks. This may be obvious, but I’ve included it as Funding Circle provide nice charts! Here is the returns profile after 1 year of those who invested in 10% chunks of their total investment:
And here is the same with those who had a more diversified portfolio with at most 1% chunks:
Source: https://www.fundingcircle.com/uk/fixedrate/ on 16/01/2017
Funding Circle has a fixed rate against the risk rating of the borrower. The highest rate E rated loans sell very quickly on the primary market.
Funding Circle SME Income
There is a Funding Circle Income Fund with trades as its own investment vehicle and is separate to the main Funding Circle platform. This is worth a look if you want to avoid the manual work of picking loans, or the worry that the autoinvest will pick up others’ dud-loans. I have not done much reading into this myself, but you can read more about it:
Note that there is an additional layer of variability when you invest in this, as the price may follow the whim of the market rather than the NAV of the underlying assets.
Some investors have voiced concerns about ‘grade inflation’ with Funding Circle’s risk ratings, where higher risk loans are being given safer risk ratings than previously and hence at a lower rate of return. These critics may argue that as Funding Circle are incentivised to write as many loans as possible (for the 1% flat fee) they are prepared to have slightly higher bad debts and lower returns to achieve this.
Personally, I do not have a view on this one way or another and it has not put me off investing in Funding Circle. Over the last 6 months I’ve seen Funding Circle’s expected rate of return fall from 7.4% to 7.2%, but this is over a time where expected rates of return have fallen across the board on many platforms.
Funding Circle is a stable, well designed platform that has probably less platform risk than its smaller competitors. Compared to the largest platforms an expected return of 7.2% means you’re likely to beat the predicted 6.7% returns on Zopa Plus or 5.7% on Ratesetter. A secondary market lets you sell out for a fee of 0.25% against 1% on Zopa Plus or potentially more on the 5 year Ratesetter product. Of these three it also has the simplest cashback, with £50 back from a £1000 investment within a couple of months.