Recently, Funding Circle, the small business lender, took the decision to cut its expected returns for their UK retail investors.
This comes after all of their UK and US loans, made in 2017 and 2018, were set a higher default risk. This encouraged lenders to tighten their lending criteria, which meant predicted returns would fall.
Peer-to-peer lenders attract investors who seek a better return rate, compared to what high street banks or other financial lenders can offer. Therefore, Funding Circle and close competitors can create portfolios of loans, spread across different businesses, to reduce the risk the bad loans bring.
Customers have the ability to choose between a high risk and low risk option. Higher risk options give a 4.5 per cent to 6.5 per cent return rate for UK retail investors; down from 5.5 per cent to 6.5 per cent, which was predicted in February. This compares to the low risk option which has a 4.3 per cent to 4.7 per cent rate, rather than the 4.9 per cent to 5.2 per cent rate previously.
Analyst John Cronin, from Goodbody, said that if there was a downturn, he would be concerned aboutFunding Circle’s loans.
‘’We suspect many customers are not sufficiently compensated relative to the risks they are taking, despite the juicy returns on offer – with some of the retail investor base particularly at risk in this respect.’’
Funding Circle themselves believe the market for small business loans is strong. They do however expect more volatility for its high-risk loans.
In 2018, Funding Circle was one of the highest-profile IPOs, with a company valuation of £1.5bn. They listed on the stock exchange last September, becoming one of the first peer-to-peer lenders to float.
After seeing disappointing returns, Funding Circle’s sister investment trust, Funding Circle SME Income was wound down.
Following these events, within the last few days the share price of Funding Circle has fallen significantly.