FUNDING Circle’s chief risk officer has underlined his confidence in the economic environment for small businesses in the peer-to-peer lender’s four markets, but noted that rising consumer insolvencies in the UK had trickled through into some of its loans.
Jerome Le Luel said that the four markets where Funding Circle lends to small businesses – the UK, the US, Germany and the Netherlands – have all recovered from the 2008 recession and shown sustained economic growth over the past four years.
“This positive economic environment has created conditions that are highly favourable to lending,” he said in a blog post on Funding Circle’s website. “As a result, credit defaults for businesses have reduced significantly following the recession.”
Looking specifically at the UK, he noted that consumer insolvencies have risen over the past two years, which he attributed to “a steady increase in consumer borrowing since 2013 as wages struggle to keep up with the cost of living”.
He warned that this trend is having a knock-on effect on the overall insolvency rate of UK small businesses, which has risen slightly in recent months.
This could be because business owners are relying on personal credit cards rather than business bank overdrafts to manage their company’s cash flow, he said.
“This has impacted a small population of loans in our higher risk bands who can be more susceptible to shifting trends in the consumer credit environment,” he said. “These headwinds are reflected in the projected returns for our 2016 and 2017 cohorts, which are 5.4 per cent – 6.3 per cent and 5.2 per cent – 6.2 per cent.”
Funding Circle regularly updates and improves its assessment models and has made some adjustments in recent months, he said, which include tightening some of its credit policies and deploying its latest risk model, which incorporates data directly from the potential borrower’s bank.
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The loans that have been taken out following these adjustments are projected to deliver investors returns of six per cent to seven per cent after fees and bad debt.
Le Luel said that trading conditions “remain favourable” in the UK, despite Brexit uncertainty and affirmed that “the UK loanbook is in a strong position to weather any potential economic fallout.”
Funding Circle’s stress tests on its UK loanbook put investors’ projected annual returns in a ‘stressed scenario’ in the range of three per cent to five per cent, compared to the typical projected returns of six to seven per cent.
Stress tests on its loanbook in its other three markets also show positive returns in the ‘stressed scenario’.
“Although we can’t predict when and how the next recession will happen, my experience tells me that we are ready,” said Le Luel. “We are originating resilient loans in all of our markets, and we have the right tools in place to mitigate economic stress if needed.”