Growth Street provides secured lending facilities to UK businesses to help them with short term cash flow demands. Businesses borrowing through their ‘GrowthLine’ product pay a representative APR of 11% whilst lenders hope to earn 6.4% AER. Growth Street also offers to help businesses through its cash flow management and forecasting tool ‘Business Insights’. For me, Growth Street’s lending product is not quite as easy to get your head around as other platforms. They describe it as ‘a combination of a revolving credit facility (also called an overdraft alternative) and invoice financing’. From a lender’s perspective, loan terms are all 30 days and protected by a provision fund.

Article first written 5th December 2017, last updated 1st June with latest rate and removal of cashback offer

Key Facts

Expected Returns: 6.4% AER.
Provision Fund: Yes
Sell Out: No early sell out, but loans are 30 day terms only.
Minimum Investment: £10
Cashback: Not currently
Speed of Investment: Quite fast
Innovative Finance ISA: Not yet

Growth Street Review

I first heard about Growth Street last September. Attracted by a potential 10% cashback on £1,000 and the chance to diversify my P2x lending, I registered straight away. However at this time they were only open for LTD and LLPs so I was put on a waiting list until they began to open it up to private investors. I’ve noticed that all of the platforms which offer some sort of invoice financing product have very high barriers to entry. For example, Market Invoice and Platform Black both have a minimum investment of £50,000. So, perhaps there are some additional FCA regulatory hoops to jump through for these types of lending platforms?

This review will look at:

1. The type of lending Growth Street offer
2. The speed of investment (cash drag) and expected returns
3. Risks and the provision fund
4. My experience so far

Growth Street’s Lending Product

Growth Street describe their typical borrower as:

A profitable SME with a growing working capital need. This is often due to the payment terms with their business customers, so our most common borrowers are wholesalers, professional services, and manufacturing businesses.

From looking through the borrower FAQ’s on the website, they appear to assess potential borrowers through a phone interview, by requesting a recent bank account statement, cash flow forecasts and even requiring access to their accounting software. The rate borrowers pay is semi-flexible: an interest rate applied on a daily basis plus a 0.4%+VAT charge on the peak of the previous month.

To give a borrower’s example from a professional services background, say you are a small consultancy with a few large FTSE 100 clients. Your clients have high credit ratings and love the work you do, but use their relative bargaining power to push payment terms as far as they can. You have value held up in money you are owed from these clients but need short term cash to take on more staff to keep growing. If Growth Street are able to understand this risk through their approval process they can offer you an attractive short term rate at relatively low risk. It is easy to see how this also appeals to wholesalers buying products in bulk or manufacturers looking to scale.

Expected Returns

Growth Street advertise an AER (annual equivalent rate) of 6.5% assuming that you keep your money invested for a year and reinvest the monthly interest payments. Since loan terms are all 30 days, the cash drag (the time it takes to get funds invested) is important. If Growth Street can reinvest your funds on the same day they pay back then the AER will match the target rate once you are invested, but if reinvesting has a longer delay it will reduce the returns a little. So far for me, funds have been reinvested on the same day with no delay.

Before I invested I had made a simple calculation to model the cash drag over a year. In reality it’s not quite this simple, as all that matters is if it is reinvested on the same day rather than the number of hours taken. My rough working shows:

I calculated this by:

DayLag = (Time to Invest in hours)/24

AER% inc. Cash Drag = (1- DayLag/(30+DayLag)) * 6.5%

Risks & Provision Fund

Firstly, all loans are secured. Growth Street says:

Every Growth Street loan is secured. We typically take first- or second-ranking fixed and floating charges over all business assets. Alternatively, we take fixed charges over book debts relating to specific invoices.

There is also a provision fund to protect against losses which is held within a separate company. Looking at the latest data on Growth Street’s website, as of December 1st this had coverage ratio against expected losses of 308%. To put that into context with the coverage ratios of other large platforms:

(All numbers take from platform websites as of December 5th 2016)

As the loan terms are relatively short, I’d also like to think that Growth Street would have a faster feedback loop to identify which businesses defaulted and to improve their lending criteria.

My Lending Experience With Growth Street

You deposit new funds via a bank transfer. I made my deposit at 6pm on a Friday evening (probably the worst possible time) and it was received into my investment account by 9am the next morning.

The lender interface is very simple:

(I’ve blacked out all identifying information in the screenshots. I haven’t found a way to get the FSCS warning to disappear, it’s like a cookie warning from hell!)

Funds are automatically diversified against different borrowers, and for anonymity reasons you cannot see who these borrowers are. So in practice this means the actual investment process is very simple. To make a new investment you just choose the rate and the amount:

As I mentioned above, although the 0.1% difference between 6.4% and 6.5% may not seem significant, as the loan terms are all 30 days this becomes more important in the long term. Using the same logic as with the lending speed AER% above, I calculate if the difference in lending speed between the two options is more than 11 hours, you are better off lending at the lower 6.4% rate over the course of a year.

I invested £1,000 at 6.5%, which was fully invested within 24 hours (I had no email to confirm the exact time). As this was on a Saturday/Sunday I was quite impressed by the lending speed. When I looked into the loan contract itself the interest rate was given as 6.31%, this is the nominal rate that compounds up to a 6.5% AER once you reinvest all earnings every 30 days.

There is a similar page to manage reinvestments:

Update 4th January: My first 30 day term finished yesterday and I was interested to see how long it would take to get the money reinvested: any significant delay would cut into returns. The loan repaid and was reinvested in the same day, which was good news!

Summary

With a reasonable reinvestment speed I’m expecting my basic return to work out around 6.3% over the year. Growth Street does not appear to be a bootstrapping startup, but seems very well funded and actively recruiting to grow (I see 5 job postings on workable.com as I write this). As for risk, I plan to keep an eye on the provision fund coverage ratio and keep my P2P lending pot spread out among several platforms and investment types.

 

Growth Street Investor Reviews

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• You are an active investor in Growth Street or have been in the last 6 months.
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