Summary: Funding Secure has had its fair share of bad loans, some of which are absolute disasters. Additionally I do not feel they have adequate resources to adequately monitor the numerous loans they have, or even make an up-to-date website. However, whilst I have suffered poor results on the platform, I do feel this may be due to mistakes I have made. With a large number of loans arriving on the platform in a wide range of asset classes and a flexible secondary market, one may have a better shot of getting results.
Here is how Funding Secure compares to my other investments:
|Platform||Link||Target Rate (%)||My XIRR (%)||Current (%)||Live Rating|
|Review||Up to 16%||-1.35% (est)||0%||2/5|
DECEMBER 2018 UPDATE: Last month was a disaster, but then again Funding Secure actually crystallise losses as opposed to other platforms (which are handily pointed out in the tax statements). My estimated XIRR here actually shows as a small negative. Not adjusted for prudence, the XIRR is around 10%, but residing in my investments are some very poor investments that might recover zero or close to it (or more accurately termed ‘wipeouts’). Discounting my available balance by around 70% to reflect this, I arrive at a negative figure. Short of further things going wrong I would hope this improves, as I made some costly errors in loan selection.
What is Funding Secure?
Funding Secure connects borrowers and lenders with peer-to-peer loans secured against assets, hence the name. Initially, their targets were more personal assets, such as jewelry, cars and other items of high value such as fine art – something few platforms are keen on. More recently they have also expanded into property loans, as well as property development loans. They have a long track record, going back to 2013. Demand has not been an issue so far, with plenty of investors attracted by the higher than average returns on offer, going up to 16%.
Here is a table summarising the features that Funding Secure offer:
|Loan Types||Bridging/Development, Assets|
|Loan Security||Property, Debenture, Assets|
|Available in ISA?||Yes|
|Active on forum?||No|
The operating model for investors is in line with others: loans are introduced to the platform, for which monies are pledged and the loan draws down when the requested amount is released. As mentioned before, the range of loans is diverse – anything from jewelry to cars, to houses. This results in a disparity of loan sizes and interest rates. Even with a minimum investment of £25, the smaller sized-loans fill extremely quickly, often within hours.
Property loans, being higher in size, take longer to fill and also we are seeing the same features as seen elsewhere: new tranches of loans (where extra money is needed for redevelopment) and refinancing (where the loan is renewed for an additional amount of time).
A key difference between Funding Secure and other sites is that interest is not paid to investors on a monthly basis. Instead, interest accrues and is paid at the end of the loan term. This is fine if the loan performs, but if it doesn’t, investors may receive nothing from a particular investment.
Funding Secure offers a more flexible secondary market than most, with discounting allowed. For the risk-takers, the effect of a discount is to increase the return (because the purchase price of the debt has reduced). The payment of interest only at the end of a loan also gives rise to taxation complications. As Funding Secure explain here:
The essence of this is a buyer is liable for the whole term of interest on a loan, when they may have only held it for a small fraction of the term. The taxation effect reduces effective returns, the magnitude getting more pronounced at higher tax rates. It may be worth seeking additional advice on this matter before investing on the secondary market outside of the tax-free ISA wrapper.
How are funds protected?
There is no provision fund at Funding Secure, although this would have offered scant protection looking at the makeup of the loan book. Investors funds are said to be more secure by loans not exceeding a 70% LTV, and for property loans many are supported by a personal guarantee. In effect, the investor is riding on the fact that the LTV will be accurate, which is not often the case for differing reasons.
Pros of Funding Secure
There are a few good things about Funding Secure. Some of them are:
Wide range of assets: Property, jewelry, cars, other assets are all included under one platform.
Low minimum investment: Starting from £25 a loan.
Flexible secondary market: Allows you to sell your loans at discount (or premium, capped at 1%)
Large number of loans available: Typical loan size is smaller, and more loans originated
Higher interest rates: Up to 16% – in excess of unsecured loans on other P2P sites
Cons of Funding Secure
There are also a few bad things about Funding Secure, many of them occurring relatively recently in the past couple of years
Increased defaults: Many property facing platforms have suffered problems, particularly those whose loans rely on further development. The site seems to have shifted over the years to become more property-focused, which explains this.
Poor Management: The nature of some of the defaults give rise to the doubts of the quality of monitoring given to loans by Funding Secure – perhaps they might be stretched too thinly staff-wise.
Poor Communication: There are no fixed times for updates to be given to investors. Often updates are not given at all, or when promised, missed out altogether.
No Interest monthly: This works against investors and those looking for income, as projects invariably are delayed or need extra funding.
Secondary Market issues: Taxation is an aspect to be wary of when purchasing secondary market loans.
Old website: Nothing major, but the website is tired and could do with an update.
A mixed bag of loans – an unsuitable model?
It is fair to say that some of the biggest debacles of loan failures reside on this platform. The move into property-backed lending was attractive for Funding Secure because it allows revenues to grow at a massive pace. One house may be worth the same amount of money as hundreds of jewelry loans, for instance.
The troubles are that the pawn-style model suitable for jewelry may not be as suitable for property. And the insistence of being focused on the security and less attention paid to everything else has led to some real disasters, compounded by poor management. A case in Cumbria showed that hundreds of thousands of pounds were lent out for the purposes of constructing a new block of flats, with further tranches advanced as stages were completed. The trouble was no stages were completed at all, and contemporaneous photos from the P2P forum confirmed this. This property was later sold at auction and looks to be close to a 100% loss for investors.
Further disasters can follow when the security is only a second, or even worse, third charge, which ranks behind other investors. At least one case has seen the second charge holders wiped out because there was insufficient funds.
You would think that personal effects would have no problems, but they even come up with surprises. Many items such as memorabilia or antiques have volatile valuations, ultimately being what someone is willing to pay. We have seen occasions where investors have been stuck with losses because the items could not raise the cash.
Other loans are monitored rather loosely. There are several incredibly late loans on the platform now, all being allowed to run late because of the belief that they may resolve themselves soon.
That being said, there are some good loans on the platform, in my own opinion. Physical assets which can easily be sold and have a reliable value which you can verify yourself have a good margin of safety, as do the straightforward bridging loans for properties. Unfortunately, these are the types of loans that go pretty quickly.
Would I still invest with Funding Secure today?
Maybe. As above, I feel there are some good loans. But they are not that common on the platform, and as there is often little warning on when they appear, and when they do they can disappear pretty fast. For example, you are unlikely to get a part of a £5,000 loan on a Rolex watch unless you are there at the second it opens.
A lot of my poor performance I would put down to errors made by myself. For instance, I was attracted to the secondary market, buying up loans at discounts as the returns were really attractive. There was nothing wrong with purchasing off the secondary market, but I bought too many things, in retrospect.
Funding Secure Funding Strategy
With my failures in mind, if I could have my time again, I would do things differently, for instance:
Invest small – Invest only the minimum per loan, as there are enough loans to diversify well
Ignore secondary market – The effective rates might look very tempting, but I would steer clear
Diversify loan types – Pursue non-property types of loan more
Verify valuations – As far as you can, verify the valuations yourself to see if they match up with the original
Limit liability per borrower – Often the borrower has more than one loan, secured on a different item. Going into both loans can increase your liability
Don’t invest in additional tranches – Again, this simply increases your liability should things not go well
Don’t tick ‘renew’ – If you automatically renew loans, your investment rolls over to the next loan
Ignore ‘renewals’ and ‘supplemental’ – Obviously a generalisation, but these types of loan indicate a deviation from the original plan and should be treated with caution
Ignore anything less than a first charge for security – second, and even third charges have appeared on this platform. I don’t lend against these, because the interest increase is usually very modest for taking on a lot more risk.
SUMMARY: A lot of defaults and late loans here and some questionable loan management. The nature of interest paid on loan maturity will put off some investors. Some careful loan selection is needed to avoid being overweight in any particular type of loan.
Disclaimer: This article represents my own opinions and should not be substituted for investment advice. Please research before you invest with any firm. Typically P2P investments are not covered by the Financial Services Compensation Scheme (FSCS) in the way bank deposits are, and there are no guarantees that you will receive the returns advertised (or even a return at all).