Funding Circle - Unsecured Business Loans
Summary of Investment Proposition
All investments made on the Funding Circle platform are in unsecured loans to UK businesses. The platform features no provision fund and instead seeks to mitigate risk via diversification. This increased risk brings the potential for increased reward with expected returns of between 4.5%-6.5% (Balanced portfolio).
I personally made a £2,000 investment in Funding Circle on 25 January 2019. I continue to hold this investment and have been impressed with the platform to date. After 3 months, my investment has delivered an annualised return of 10.3% though I expect this to fall over time.
Funding Circle is one of the most established P2P players and is listed on the LSE with a total market value not far shy of £1.0 billion. The current best cashback offer (available via my referral link) is a £50 Amazon voucher (2.5%) for a £2,000 investment. Whilst this isn’t particularly high, it’s a nice perk if you are going to invest anyway. It’s worth noting that other less established platforms such as Growth Street are offering significantly better cash sign-up deals (currently £200 cashback for a £2,000 investment).
Time in business
Hands off investing
Summary of key features
The key features of the Funding Circle investment account are listed below.
|Estimated annual returns||4.5% - 6.5% if investing in the 'balanced' portfolio.|
|Provision fund||✗ - Platform seeks to manage risk via diversification.|
|Innovative Finance ISA||✓|
|Cashback offer||£50 Amazon voucher if you invest £2,000|
Detailed Funding Circle Review
Funding Circle was one of the UK’s first peer to peer lenders, having first launched in 2010. Since then, the business has significantly grown its loans under management and became the first P2P lender to list on the London Stock Exchange in 2018.
If you find my review useful and choose to sign up after reading, I would really appreciate if you would sign-up via my referral link.
Where does Funding Circle invest my money?
All investments made on the Funding Circle platform are in unsecured loans to UK businesses. Whilst the loans offered on the platform are unsecured (i.e. there is no legal charge over specified assets should the borrower fail to repay the loan), Funding Circle does require a personal guarantee from the company directors in the event that the business is unable to repay.
What investment options does Funding Circle offer?
When opening a Funding Circle account, you have two options depending on your risk appetite:
- Balanced lending approach – Lend to the full range of businesses borrowing on the platform.
- Conservative lending approach – Lend to only those businesses deemed lower risk by the platform.
I personally opted for the balanced lending approach, which has a higher expected annual return (between 5.5% and 6.5% at the time of writing) compared to the conservative approach (between 4.9% and 5.2% at the time of writing).
These same two options are available within both the ‘Classic’ account or the ‘Innovative Finance ISA’ account.
How long is my money tied in?
Your investment will be diversified into many different individual loan parts (minimum £10 per loan part). Each of these loan parts will vary in term length between 6 months and 5 years.
There are two options to withdraw your funds. The first option is that you could turn off reinvestment and withdraw repayments as they are received. However, should you require your funds sooner, you can also resell your active loans to other investors with no fee attached provided there is sufficient demand from other investors looking to buy at that time.
However, should you wish to take advantage of the cashback offer on sign-up; you will need to leave your capital untouched for a period of one year.
How frequently is interest paid on the money I invest?
Loans are typically repaid in fixed monthly installments. When a repayment is made, the funds are distributed to all investors who provided the capital for that loan.
How good is the website reporting?
I find the Funding Circle dashboard really straight-forward and easy to follow.
The dashboard immediately presents you with a summary of net interest earned, total portfolio value, annualised return based on current earnings and the number of businesses you are currently lending to.
Digging deeper, you can view some high level information about the loan parts you are exposed to. Information such as sector, risk rating, interest rate, and number of repayments remaining.
You are also able to view your transaction statements (showing each of repayments coming into your account) and tax statements (detailing interest income and bad debt levels).
Is money invested in Funding Circle protected?
Funding Circle Ltd is authorised by the FCA (link).
Authorised status does not mean that money invested is covered by the FSCS protection scheme which applies to banks, building societies and credit unions only. However, it does provide some comfort as authorised firms must comply with client asset rules which set out how firms hold and control client money.
Generally, it’s important to remember that investing in P2P lending is riskier than putting your money into a savings account. The two key risks in my view are 1) borrowers do not repay on time and 2) Funding Circle itself goes into administration. We discuss both of these scenarios below.
Risk of borrowers not repaying on time
Investments made via the Funding Circle platform are tied to specific loans. This means that each investor will experience different levels of bad debt. The platform attempts to mitigate bad debt risk via diversification. The recommended minimum investment is £2,000 as this would result in your funds being split across 200 different loans, resulting in a maximum 0.5% exposure to each individual loan part. It’s important to note that Funding Circle does not operate a loan loss provision but will attempt to recover unpaid debts in the event of default. Expected bad debt is already incorporated into the expected returns percentages quoted. Funding Circle frequently performs stress tests to gauge how well investments would perform should bad debt levels be higher than expected.
Risk of Funding Circle going into administration
As an FCA authorised business, Funding Circle is required to have a back-up plan in the event of going out of business. This plan is published and available for investors to access. The important thing to note is that the back-up service providers would continue to manage and administer the existing loan contracts. Investors should therefore continue to receive loan repayments as usual. In reality, I expect that whilst you would continue to receive payments, there may be some delays and selling your loans prior to the end of the loan terms may not be possible.
Is Funding Circle financially secure?
Funding Circle is the first peer to peer platform to become listed on the main market of the London Stock Exchange, having floated in October 2018. At the time of writing (March 2019), the company is valued at £1.2 billion.
The latest company accounts filed for Funding Circle Holdings Limited (company name prior to going public) for the year to December 2017 report an operating loss of £37.2 million. The notes state that this loss was driven by significant ongoing investment in staff, technology and marketing.
I don’t personally view this as a major concern right now given that the business is significantly growing its loans under management (and thus increasing its ongoing revenue which is directly linked). The current market capitalisation is suggestive that institutional investors are confident in Funding Circles future prospects.
What data does Funding Circle publicly provide investors?
Funding Circle currently provides high level data to potential investors:
- Quantum of loans under management
- Projected annual returns to investors (by year loan taken out)
- Projected gross yield (i.e. annual interest actually paid by businesses)
- Projected bad debt rates
- Lifetime default rate
- Borrower statistics (location, business sector, average turnover, number of employees and age of business).
The most important piece of data to keep an eye on is the lifetime default rate.
How easy is the sign-up process?
I found the process simple. I needed to provide some verification documents (likely due to the fact I’ve not lived at my current address for very long) but they were acknowledged quickly and my account was verified shortly after.
How can I pay money into my Funding Circle account?
Deposits can be made via debit card (instant) or bank transfer (1-3 days).
Does Funding Circle offer an IFISA?
Yes, Funding Circle offers two different account types, one of which is an Innovative Finance ISA. Within this account, you can make the same investment choices as you can within the ‘Classic’ account. The only difference is that any interest generated is tax-free.
How good is the feedback online for Funding Circle?
Funding Circle has strong feedback online with a TrustScore of 8.7/10 on TrustPilot based on 5158 reviews (last checked March 2019).
What cashback does Funding Circle offer its new investors?
Funding Circle current cashback rates offered are as follows:
- £50 cashback (Amazon voucher) for investments of £2,000 or more
- £100 cashback (John Lewis voucher) for investments between £15,000 and £19,999
- £150 cashback (John Lewis voucher) for investments between £20,000 and £29,999
- £250 cashback (John Lewis voucher) for investments between £30,000 and £39,999
- £400 cashback (John Lewis voucher) for investments of £50,000+
I personally made my first investment of £2000 in Funding Circle on 25 January 2019. My £50 cashback (in the form of an Amazon voucher) is due to be sent within two months.
If you do decide to invest and you have found this review helpful; please do consider signing up via my referral link. This will enable me to continue paying for the running costs of this website.