Your guide to growing your business with Funding Circle

Getting started as an investor

A guide for investors

A GUIDE FOR INVESTORS

MAKE A RETURN AND A

DIFFERENCE

You can earn attractive, stable returns by lending to businesses through Funding Circle. Set up your account in minutes, then use our simple lending tools to lend to hundreds of businesses automatically. You can also open an ISA account to earn returns tax-free.

Your lending will help those businesses to grow and push the UK economy forward, and you’ll earn a return as they pay you back with interest. We believe it’s a better system for everyone.

About this guide

In this guide you’ll learn how to start lending, how to find your way around your account and other important information about lending through Funding Circle.

If you have any questions, you can contact our Investor Support team by phone or email.

020 7401 9111
Monday - Friday, 9am - 6pm (exc. Bank Holidays)

If you’re unsure whether lending is right for you, you should seek independent financial advice before you start. Remember by lending to businesses your capital is at risk, while tax rules and relief can change depending on your personal circumstances. Funding Circle is not covered by the Financial Services Compensation Scheme.

Contents

  1. How lending works
  2. Who am I lending to?
  3. Your investor account
  4. Your account summary
  5. Lending options
  6. Accessing your money
  7. ISA account
  8. Interest, tax and fees
  9. Further information

How lending works

We connect established, creditworthy businesses looking for finance to investors with money to lend. Whether you have a Classic account or an ISA account, lending to businesses works in the same way.

Investors

Funding Circle reviews applications and only approves creditworthy businesses. We then pay out your funds to the businesses you lend to, and process your repayments.

Businesses

Businesses make fixed monthly repayments with interest, which we distribute to all the investors who lent to them.

The lending process

  1. The business applies for a loan
  2. We review applications and only approve creditworthy businesses
  3. The business repays the loan with interest

If accepted, the loan is funded by lots of investors each lending small amounts. These are called loan parts. Each loan part represents the loan contract you and the business have entered into. You’ll be able to lend across lots of loan parts to build a diversified portfolio.

  1. Repayments are reinvested: As long as you keep lending active on your account, your repayments will be continuously lent out again on other loans. This helps your interest to compound, maximising your return.
  2. Withdraw your funds: You can pause lending and withdraw repayments as they come in, or look to sell loan parts to other investors (subject to demand).

How we manage risk

Only established businesses who have passed our rigorous credit assessment process can borrow through Funding Circle. However, it’s important to remember that some businesses will not be able to fully repay their loan. We call this a bad debt, and it’s already accounted for in your projected return. We reduce the impact it has on your return in 3 important ways:

Rigorous assessment with advanced technology

There are 3 key pillars to our assessment process:

  1. Policy criteria: We receive thousands of applications from all types of small businesses. To help our team focus on the right type of application, we have criteria in place that filter out businesses who have a low likelihood of being approved. To be eligible for a loan a business must have:

  1. Statistical credit models: Our proprietary credit model uses thousands of data points to assess the creditworthiness of every business that applies. It uses publicly available information, credit bureau data and our own historical data of loan performance and applications. Successful applications are then given a risk band from A+ to E (where A+ is lowest risk), which helps determine the interest rate they’ll pay.

  2. Expert judgement: Alongside our statistical credit models, each business is manually assessed by a member of our credit assessment team, who combine decades of experience from some of the world’s leading financial institutions. They use our credit model and financials relating to the business and company directors to manually assess each application. This allows the team to raise and clarify any potential questions before a loan is approved.

The combination of these 3 pillars gives us a full picture of a borrower’s financial health, allowing us to make balanced credit decisions so that you can earn stable returns. You can read more about our assessment, the distribution of loans by risk band and the range of interest rates here.

Diversification

Diversification, where you spread your lending across many businesses, is the best way to earn a stable return as it reduces the impact of businesses being unable to repay their loans. By using our automated lending tool, you can easily lend to hundreds of businesses to quickly build a diversified portfolio.

As the minimum you can lend to each business is £10, lending at least £2000 will allow you to:

Investors lending more than £2,000 will lend no more than 0.5% of their total portfolio to each business.

Collections and Recoveries team

Funding Circle loans are typically supported by a personal guarantee from company directors (or members if the business is a LLP). We also sometimes take other forms of security, for example on property finance loans. If a business is unable to repay the loan, our team can look to recover the outstanding balance from the guarantors.

Our Collections & Recoveries team pursue every single late or defaulted loan, arranging a new payment plan if possible, or opening up legal proceedings. The team has a range of methods and technologies in place to recover as much as possible for you.

When a loan defaults, it will show the total loss on your account. However, our team are often able to recover a significant portion of that loss, so it’s worth remembering that the amount “lost” on recent defaults may improve over time.

Please note, a personal guarantee, or any form of security, does not ensure a full recovery of outstanding debts will be made if a loan defaults, and there may be instances where no recovery can be made.

Who am I lending to?

You’ll lend to hundreds of established, creditworthy businesses in different sectors and regions throughout the UK. They may use their loan for a wide range of purposes, including to hire staff, buy new stock or equipment, open new premises or boost cash flow. All businesses will have been trading for 2 years or more, but our average business is 10 years old.

Debbie Leon from Fashionizer has won awards for her innovative uniform designs. She borrowed £195,000 for working capital.

Metric Value
Average business age 10 years old
Number of employees 6
Turnover £900,000

Businesses from every region in the UK have borrowed, and an estimated 72,000 jobs were created and sustained in 2018 thanks to investors lending through Funding Circle. Oxford Economics estimates that for every £1 lent through Funding Circle, £2 is added to the UK economy, so your lending really will make a huge difference to British businesses and our economy.

Types of businesses

There are two types of loans on our platform – small business loans and property finance loans – and there are slight differences to how these loans work. We expect to stop all new property finance lending by mid-2018.

Small business loans

Business owners may need finance for many reasons, for example to expand their premises or hire new staff. Their loans will be covered by a Personal Guarantee from the directors or shareholders of the business. They will pay back their loan in monthly instalments of both principal (the original loan amount) and interest.

What are the risks of lending to small business loans?

As part of lending to businesses, there will be instances where a business cannot continue to repay their loan, which becomes a ‘bad debt’. When this happens, our collections team work to recover your money.

We provide bad debt rates by the year loans are made, and update these regularly. You can view our bad debt rates on our statistics page. You can read more about the key features and risks of lending to small businesses here.

Property finance loans

Lending through Funding Circle also helps experienced property professionals build new residential homes, refurbish existing properties and access short-term finance.

All property finance loans are secured against an asset, which means if the borrower is unable to pay their loan, Funding Circle can enforce the security and use the sale of the asset to repay investors. Unlike small business loans, the interest payable by the borrower is typically funded by investors alongside the principal when the loan is first made.

Investors will then typically receive monthly instalments of interest. The principal and interest is then repaid by the borrower at the end of the loan term when properties are sold.

How are property finance loans assessed?

Property loans are assessed by our experienced property credit assessment team. Some of the key considerations when deciding whether a loan should be approved are:

Funding ratios: We ensure that the value of the property that is used as security is higher than the value of the loan requested by the borrower (i.e. an appropriate Loan-to-value ratio). The borrower also needs to commit an appropriate amount of equity to the project, in case market conditions change.

Property fundamentals: We assess whether the proposed property is the right fit for its location, has an appropriate sale price and the building costs/timings are suitable for the term of the loan.

Borrower track record: We want to be comfortable that the borrower has successfully delivered similar projects in the past. Like small business loans, property finance loans will be assigned a risk band, however the interest rate will be priced individually for each loan.

What are the risks of lending to property finance loans?

As property loans are secured against an asset, if the borrower is unable to repay, we can use the sale of the asset to pay investors back. Although we would often anticipate a significant recovery this can’t be guaranteed, and could take a significant amount of time, for example if market conditions change.

Most property loans repay on time, however delays can happen when building homes. These can be caused by bad weather, construction issues or the sales process taking longer than expected.

Your investor account

Account types

At Funding Circle we offer two types of investor accounts; ISA and Classic. They work in the same way, however the ISA account allows you to earn interest tax-free.

ISA account

Classic account

Getting started

You can set up your ISA or Classic account and start lending in a matter of minutes. Enter a few details about you on our simple form, pick your lending option and read and accept our terms and conditions. Then transfer money from your debit card and you’re ready to start lending.

Account Summary

Here you can keep track of your interest earned to date, the loans you’re bidding on, the businesses you’re lending to and much more.

Net earnings and earnings summary

Portfolio total

Annualised return

My statements

Active lending

Once you’ve set up your Classic or ISA account, picked your lending option and transferred funds, you will automatically start lending your funds to businesses. Our lending tool will help you build a portfolio of loan parts, aiming for a projected return in line with that of your selected lending option.

As loan applications are approved, the lending tool will order parts of those loans on your behalf. These show as ‘Orders’ on your account summary page. When the loan is fully funded, your order will then become a loan part, and will show in ‘My loan parts’. It will also buy loan parts from other investors who are looking to sell. When a loan part is sold, a 1.25% transfer payment is deducted and passed to the buyer. For example, when buying a £20 loan part, you would pay £19.75 to the seller.

Our tool will also help you build a well diversified portfolio. New loan parts range from £10 to £100, and investors lending £2,000 or more will lend no more than 0.5% of their portfolio to any business.

Reinvesting

You’ll receive monthly repayments from the businesses you’ve lent to. Typically, the repayments will be both principal and interest, although property loans differ.

By keeping lending active, our lending tool will keep lending out your repayments and any available funds. This helps your interest to compound and maximise your return.

If you would like to stop reinvesting, you can pause lending on your account at any time by going to the ‘Lending settings’ tab in your account.

Your lending options

To help you get the return you’re looking for, you can choose between two lending options. You’ll need to select an option when you set up your account, but you can change it at any time in your account.

Conservative

Balanced

What return can I expect to earn?

The projected return for each lending option can change. You can see the current projected return for each option on the Lending Settings page of your Funding Circle account.

When you lend to businesses, your funds will be matched to borrowers with the aim of meeting the projected return of your chosen lending option.

Important

Remember, by lending to businesses your capital is at risk.

Changing your lending option

You can change your lending option at any time by going to the ‘Lending settings’ tab in your account. Simply select the option you’d prefer and click save. Remember, this will only affect new lending on your account, so your projected return will change gradually as you begin to lend to businesses through your new lending option.

Transfer funds from your bank

Once your account is set up, go to the ‘Transfer money’ tab to move funds in or out of your account. You can transfer money in using:

Important

Please note you must use a bank account or debit card in your name, otherwise your payment will be rejected. When using a bank transfer, please ensure you enter the reference number provided, or your transfer won’t go into your account. Unfortunately, we can’t accept cheques or credit cards.

To help you diversify and earn a more stable return, we suggest lending £2,000 or more. If you’d like to start with less, there is a minimum initial transfer of £1,000 when opening a Classic or ISA account. This must be made by a debit card and only applies to your first transfer.

Accessing your funds

When you lend through Funding Circle, your money is matched to loans which are paid back over a period of up to five years. As a result, it is important to treat lending as an investment, as your money may be tied up for this time period.

When you want to withdraw funds

  1. Switch off lending to withdraw small amounts: If you’d like to take out small amounts, you can withdraw your repayments as you go. Simply sign in to your account, go to the ‘Lending Settings’ page and turn off lending. Your repayments will no longer be lent out and the funds will accrue in your account ready for you to withdraw.
  2. Sell loans to withdraw a lump sum: If you would like to access your funds before your loan parts have been repaid, you can look to sell them to other investors using our automatic tool. Selling loans is subject to supply and demand at the time and is not guaranteed.

Is there a cost to selling loans?

When selling loan parts, a 1.25% transfer payment is deducted and passed to the buyer. For example, if you sell a £20 loan part, you’ll receive £19.75 (plus any interest owed since the last repayment). This happens at the point of sale and only to loans that are sold successfully.

100% of the transfer payment goes to the buyer. Funding Circle does not receive any fees from any loan part sale. The transfer payment does not apply if you want to withdraw repayments as they come in.

How much of my portfolio can I sell?

To make it fair to all investors, you can only sell active loans with no credit issues, and not in the last month of their term. As a result, typically 85-95% of your portfolio is available to sell at any one time.

How much can I access early?

Typically, you can get early access to approximately 85-95% of your funds. A loan can only be sold if it is active with no material credit issues, the business is still trading and not in the last month of its term. Often the remaining businesses will continue to make repayments, and their loans may become sellable again in the future.

How long does it take to sell loan parts?

Selling loans is not instant and depends on the supply of loans and demand from other investors looking to buy at that time.

Statistics

So you can see exactly how well we’re doing, we publish all our performance data on our statistics page. You can also find in-depth articles and other resources on our blog.

ISA Account

Individual Savings Accounts (ISAs) are accounts for savings and investments that let you earn tax-free returns. The Funding Circle ISA is an Innovative Finance ISA, which allows you to earn tax-free returns by lending directly to businesses through Funding Circle.

Every tax year you have a subscription limit which can be split between a Cash ISA, Stocks & Shares ISA, Lifetime ISA and an Innovative Finance ISA. You can only subscribe to one of each ISA type per year, so it’s important to choose your ISA provider and product carefully.

ISA key facts and features

Important

The Funding Circle ISA is also a flexi ISA, which means you can take money out of your account and put it back later in the same tax year, without losing your tax-free entitlement.

Transferring your existing ISAs to Funding Circle

You can transfer any existing ISAs you hold over to your Funding Circle ISA, subject to any restrictions set by your current provider. This means that any funds you hold in a Cash, Stocks & Shares, or Innovative Finance ISA can be transferred to your Funding Circle ISA without affecting your current tax-year ISA subscription, unless you are transferring any funds you have used to subscribe to an ISA this tax year.

Transferring money to another ISA provider

If you want to transfer your Funding Circle ISA to another ISA provider, you must first sell your loans. Any loans that cannot be sold will be transferred over to a new Classic account and will no longer be eligible for tax-free interest.

Interest, tax and fees

Interest

The interest you earn is paid by businesses on a monthly basis. Between monthly repayments, you accrue interest daily, which is shown in the Summary page of your account as accrued interest.

Tax

If you have an ISA account, any interest you earn from loans held within the ISA is tax-free. Each tax year you have a subscription limit which can be split across one of each type of ISA.

If you are lending as an individual through a Classic account, the interest you earn is paid to you before tax and you may need to pay income tax on your earnings. You should declare any interest to HM Revenue & Customs on a self-assessment tax return or inform your local tax office.

Fees

Your projected return includes the 1% annual servicing fee. It is calculated monthly on the outstanding loan amount and taken directly from loan repayments. This means that by the time the interest reaches your account, the servicing fee has been applied. No servicing fee is taken from recoveries on defaulted loans.

There are no charges for opening an ISA or Classic account. When a loan part is sold, a 1.25% transfer payment is deducted and passed to the buyer. There are no fees for withdrawing available funds, or on funds that aren’t lent out.

What happens if Funding Circle goes out of business?

In the unlikely event that Funding Circle goes out of business, you would continue to receive repayments for the loans originated on our platform and our back-up service provider would administer these payments for you. Funding Circle is not covered by the Financial Services Compensation Scheme.

Further information

Please visit our help centre for more details on a wide range of questions, including: What are the key features and risks of lending to small businesses? What are the key features and risks of lending to property professionals? What would happen in the unlikely event that Funding Circle goes out of business? What does it mean to be a Retail Client? How to make a complaint. If you have any further questions or would like to speak to someone, our team are always happy to help.