Funding Circle has said that it expects investors’ returns on all cohorts of UK loans to remain positive but warned that some will be lower than initially forecast due to the economic downturn.
Projected returns for the 2014 cohort of loans are expected to come in at seven to 7.1 per cent; the 2015 cohort is predicted to come in at 6.9 per cent; 2016 at 4.3 per cent to 4.6 per cent; and the 2017 loans are expected to produce returns of 2.3 per cent to 2.8 per cent.
The 2018 cohort of loans is expected to offer returns ranging from 0.9 per cent to 1.9 per cent; 2019 loans have projected returns ranging from 1.2 per cent to 2.7 per cent; and the 2020 cohort comes in at 2.2 per cent to four per cent.
“Throughout this pandemic, small businesses have been resilient and adapted quickly in a changing environment, and 90 per cent are now making payments,” said Chief risk officer Jerome Le Luel in a blog post on Funding Circle’s website.
“However, they have faced significant challenges, and our belief is that short-term payment plans have and will continue to give businesses time to get back on their feet, generate revenue and subsequently repay their loans. This helps to minimise avoidable credit losses in the long-run, protecting your returns in the process.
“Consequently, you will see a high number of businesses in your portfolio that are classified as late. As mentioned above, many of these will have taken an agreed payment plan and have now resumed their payments. However, they will continue to be classified as late until their arrears are cleared.
“Unfortunately, as expected in a recession, some of these businesses will not be able to continue trading, and we have reduced our projected return forecasts accordingly. However, we will continue to work with businesses in difficulty, and all businesses classified as late receive frequent contact from our expanded collections and recoveries team.”
Funding Circle has stress-tested its loanbook to try and predict how it will fare in the current economic downturn.
Le Luel noted an initial spike in credit stress, which it expects will be followed by “a more spread out and milder stress that gradually reduces over time as the economy recovers – more akin to what you might see in a normal recession”.