Funding Circle Review – An Experience (Updated January 2021)

Summary of Funding Circle Review
Funding Circle is one of the oldest P2P lending platforms. With a successful IPO this should offer one of the greatest levels of security for investor funds short of being FSCS protected. That being said, over the years it has become far less transparent with investors. Choosing loans or engaging with the platform have become things of the past. Returns have suffered over the years and may not be a good choice in a recession as many loans are not secured by assets, only guarantees. Nevertheless it remains an extremely popular platform. It is possible to diversify investments across many hundreds if not thousands of loans.

Here is how Funding Circle compares with similar platforms:

PlatformLinkTarget Rate (%)My XIRR (%)StatusLive Rating
ReviewUp to 15%11.36%OPEN4/5
ReviewUp to 7%5.68%OPEN2.5/5
ReviewUp to 5.3%5.04%CLOSED3/5
http://www.huddlecapital.comReviewUp to 16%8.0%OPEN3/5

What is Funding Circle?

Funding Circle was established in 2010 and filled in a great gap in the market. It offered business loans that could be funded by individual investors on a peer-to-peer basis. This served an important need. Many businesses who were unable to get finance at a bank could now apply for a Funding Circle loan. At the beginning the offering was genuinely innovative. Investors could ‘bid’ at specific interest rates, so it worked like a reverse auction – the market determining the rate of loan. Loans of all types used to be offered, with business and property-backed loans being offered on the platform.

Many things changed over the years. The auction-style rates were abandoned and risk bands inserted with fixed rates. Property development loans were abandoned as many of these had led to losses. The firm once prided itself on communicating with customers and had its own forum. This was then shut as people started to complain about non-performing loans.

This eventually went full circle as it was then decided that loans would become a black-box model. You simply applied the funds and whether you wanted to be ‘Conservative’ or ‘Adventurous’. The system then allocated loans and diversification for you. Whilst it was possible to see the loans you had invested in, there was no way for any manual management of the account.

Interest rates vary considerably depending on the risk level of the business being lent to. Since the investment is automatically diversified, an aggregate is quoted.

The story was more successful for investors in the company. Funding Circle had many rounds of private investment, culminating in a stock market listing in September 2018 with an initial value of £1.5bn. A success story for a start-up, albeit only initially. In just over a year the Funding Circle share price has lost over 80% of its value, and its market cap by the end of 2019 sat close to £250m.

Here is a table showing Funding Circle’s features:

Advertised Returns5-5.5% (Conservative)
6-7% (Balanced)
Loan TypesBusiness
Loan SecurityGuarantees/Debenture
Minimum Investment£10 or 0.5% of account
Cash DragSmall
Secondary Market?Yes
Provision Fund?No
Auto Invest?Yes
Available in ISA?Yes
FCA Authorised?Yes
Active on forum?No
Sign-up offers?£50 on £2,000

Are Funding Circle profitable?

Funding Circle are a publicly traded company, with their IPO in 2018. A greater deal of scrutiny can be given to their accounts. They are still heavily loss-making as their business still scales up, although given the recent profit warnings I am sceptical that this will ever be a solid business. Wages and marketing costs seem to be two things that will not be coming down any time soon.

But on the other hand, they are well capitalised for the moment. At the last half year statement for FY20 the trend of losses continued as they booked a large operating loss of £113.5m. Although not all of this loss was in cash (some impairments), the net asset position declined by almost £100m to £216.9m. The cash position decline was much less than this – only dropping by c.£30m but this is on a backdrop where bank borrowings and bond issues increased by almost £100m.

Obviously this trend cannot continue forever and Funding Circle have to reach profitability or cash-generating status within the next few years otherwise more debt or an equity raise will be required.

Operating Model

From an investor perspective this is very simple. Your Funding Circle account can be funded via bank transfer or debit card (minimum £100). Once the money is received into your account you can then choose your type of account. The choice is Conservative or Balanced. The difference between the two is that the first only invests in ‘A and A+’ rated loans and pays a lower range of interest (5-5.5% to 6-7%). This is important as it is either one or the other. You will not be able to have a mix of the two.

Once money is allocated to a strategy the account will buy loans on your behalf up to the amount you put in. The rules are simple. The system seeks to spend 0.5% on a loan part with a minimum of £10 and a maximum of £100 (so someone with a £100,000 account will still end up with £100 loan parts). Diversification across the different risk bands is also done automatically.

Virtually all business loans amortise so interest and capital are repaid monthly. The nature of auto-bid is such that it is always looking out for loan parts. Once your account gains enough cash to purchase another loan part, it will do so. In this way there is little need to check your Funding Circle account at all, unless you want to withdraw.

Loans can be tracked from your dashboard. This allows you to see what loans you have invested in as well as any details on loans falling into trouble. The latter is a very big part of Funding Circle. With a very large number of loans, some falling into trouble is inevitable. In a practical sense you will be able to do very little about it as loans become unavailable for trading when this happens. You can cash out money of your portfolio (either some of it or all of it). Up until recently this is done very quickly, although there is no control over which loans are sold.

Coronavirus Woes

Predictably, the recent pandemic has been very bad for Funding Circle. Things were almost entirely downhill after the IPO. A mass exodus of investor funds led to large queues on exit, and the imposition of selling fees. This changing sentiment was almost wholly derived from unsatisfactory loan performances.

Funding Circle lends to the businesses that may be more affected by the lockdown. Many investors saw a rapid increase in delayed payments. Some of these will undoubtedly end up as defaults. With large parts of investor portfolios effectively frozen, this does not look like a good result.

How are funds protected?

There is no provision fund attached to the loans. If a loan goes bad the loss is immediately crystallised and deducted from the account. Many loans are secured by way of guarantor or debenture. Neither have proven to be a quick resolution in the main, with many loans going a long way past overdue before being written off. Property loans are secured by assets, although this type of loan is a minority on Funding Circle. Where Funding Circle performs a little better is the recoveries: perhaps having a larger team gives it more resources to chase debts. There have been some good results in recoveries. However this process can take a long time and you earn no interest on the funds that are missing.

Pros of Funding Circle

There are many things to like about Funding Circle, some of them are:

Platform Security: Funding Circle has been going since 2010 and has floated on the stock market. This does not mean anything for the performance of individual loans. But it should offer some security for the overall platform, as they would be able to tap the markets for capital should their business deteriorate.
Hands-off investment: The nature of the auto-invest portfolios mean that the accounts are very easy to manage and require very few manual operations.
Easy to diversify: The popularity of the platform means that there are many loans: it is easy to get a portfolio containing hundreds of loans very quickly.
Almost liquid: Similarly the large number of users mean that selling out and getting invested is very quick, although this can change, and now comes at a fee.

Cons of Funding Circle

There are also several things to dislike:

High Fees: Fees quoted are 1%, but this is 1% of your return and not the gross loan amount (as is common with other firms). This means that fees can be a lot higher than realised. Assuming a rate of 10%, the Funding Circle fee is equivalent to 10% of earnings. The net effect is to reduce the overall returns. In response to a lack of liquidity, a new fee of 1.25% was imposed on sellers cashing out.
Lower Interest Rates: Given the loans are business loans there is not much premium to be had on them. At the conservative level, funds only earn 5-5.5% which is not much ahead of a Lending Works/Ratesetter product.
Bad Loan Selection, Arbitrary Risk Bands: The old way is that there was a huge incentive for companies to co-operate with lenders in the process as being more open would secure a better rate. With that avenue gone, it appears that Funding Circle selects a wide range of businesses, some of which prove to be unsuitable. Some of the risk bands appear to make little sense in the absence of detailed information.
Vulnerable to Recession: I believe that small business loans would be more at risk to perform badly than any other type of loan if there was a recession.

My Funding Circle Investing Strategy

Funding Circle used to be heaven for those who wanted a bit more strategy. You could simply buy up a lot of high-paying interest loans and sell them after they got a couple of months old.  The reasoning was that the default risk was commensurately smaller when the monies had just arrived (a process known as flipping). With this avenue now gone, the Funding Circle strategy has gone very simple. My only points are:

Take Balanced as opposed to Conservative: The gap between the two is very small, and there rating system appears to be not watertight: I have seen some very poor loans classed as ‘A’. Furthermore, I do believe that even Conservative loans would suffer in a market downturn. I would rather have a Balanced investment here, and use funds for the Conservative one elsewhere.
Open Additional Accounts: The 0.5% of account cannot be gotten around on a single account, meaning that when you pass £5,000 your investment pieces will be £25 or more. You can keep the loan parts small by opening another account and loading that with cash, as the 0.5% rule applies to the new one as well. This slightly increases risk as it may be possible that the two accounts get one piece each of the same loan (thus eliminating the advantage). With the large amount of loans available this chance surely would be small.
Check the dashboard irregularly: I tend to not look at the dashboard very regularly because invariably loans will have defaulted. Some of the reasoning is poor (ie loans going bad after one payments, ‘organised’ defaults by legal-type firms, ‘A’ ratings given to undeserving firms.
Don’t believe their return figures: There are plenty of ways for them to game the returns figures for your account. Changes have progressively reduced transparency. It is best to keep an eye on your account values yourself and calculate your own figures that way.

CONCLUSION: Funding Circle have a long track record and have successfully loaned in excess of £5bn – not a figure to be sniffed at. Their stock market flotation gives the platform an additional layer of safety. However, effective interest rates are low and interests of shareholders may not automatically be aligned with that of interests of P2P investors. An investment here should be weighed up against the other ways to invest here. You can invest in the underlying shares or the investment trust which in theory should at least match the returns on the platform.

Disclaimer: This Funding Circle review 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. There are no guarantees that you will receive the returns advertised (or even a return at all).

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