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Not all p2p lenders are born equal


For investors, peer-to-peer lending is the process of lending money to businesses across an online platform that matches investors with borrowers, based on the investors’ personal appetite for risk. At LendingCrowd, we have a responsibility to thoroughly assess our borrowers to ensure that the loan they seek is affordable and won’t put their business under unnecessary financial pressure, whilst also having a responsibility to protect our investors’ capital.

Assessing a loan application requires careful thought and consideration, with a number of qualitative and quantitative aspects factoring into our decision. This blog outlines our robust credit process and personal approach to responsible lending.

 

We have a strong focus on affordability

Assessing the loan applicant’s financial strength to determine creditworthiness and their ability to repay is our first step. Our initial requirements of 2 years’ trading and a turnover above £100,000 must be met before we can continue processing the application. In addition to our basic criteria, we require various pieces of financial information to conduct an in depth analysis, including:

–          The last 2 years’ full annual accounts

–          The last 3 months’ bank statements

This information allows us to understand the company’s trading history and the strength of its current financial position. We take into consideration its year-on-year growth in sales, gross profit margin and net profit margin. We will also use this information to calculate key metrics such as current and gearing ratios to give an indication on how easily current debt can be met, and the proportion of the business run on borrowed money. The better the strength of these ratios and measures, the better the score the company will receive,  and the lower the interest rate on the loan.

 

How we understand the borrower and their needs

Financial metrics can provide the necessary information to support a loan, however we also place a substantial emphasis on the borrower’s management capabilities and industry dynamics. These factors will heavily impact upon their operating longevity and how the external environment may affect the businesses return on investment .

We therefore will take into consideration how long the business has been in operation for. If they have been in business for a while, have they successfully navigated difficult economic environments? If yes, they are likely to understand how to adapt their internal operations to work through external factors. Additionally, we will want to know how many industry-specific years’ experience the management team has. It may well be the case that they have plenty of experience in running a business, but are unfamiliar with industry dynamics.

Furthermore, we seek an understanding of the market the business operates in and why it requires capital. Once we have established market maturity and the level of direct competition, we can begin to consider how effective the investment may be in that particular marketplace.

The more favourable the company’s circumstances, the stronger the merit they have as a borrower, which is then reflected in the Credit Band we assign them.

 

Security

As part of our assessment, we require information on possible loan security . It is important that we develop effective security arrangements for each business loan we place on our platform as our investors’ capital is at risk. A guarantee will be required, as will a debenture (or a bond and floating charge if the company is based in Scotland). The effect of these arrangements is that if a borrower defaults on payment, we are able to take control of their assets to ensure the sum required is paid back in full.

 

Summary

Lending responsibly is our primary objective, and we ensure no stone is left unturned when it comes to the critical assessment of borrowers. As a result, we have facilitated 73 loans since October 2014 with a very low default rate.

 

Article author

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Riley O'Dwyer

2 Comments

  • Avatar Steve Miller says:

    There are notable instances in the loan book which question the robustness of the assessment process, which has on occasion missed key factors. While the statement ” . . . . we have facilitated 73 loans since October 2014 with a very low default rate.” is true in that there are no declared defaults on the platform, at the this blog was published there were at least 3 loans SEVERAL MONTHS BEHIND in their repayments, which puts serious defaults at nearly 5%. The reluctance to admit loan arrears and the inconspicuous way problems are reported and recorded gives cause for serious concern regarding the competence of the process.

    • Avatar Ian Cunningham says:

      “As outlined in the Blog each loan assessed by the Credit Team is subject to a rigorous process which includes an assessment of the business, the sector it operates in, the Management team and their experience relative to the sector they operate in and the financial/banking history pertaining to the Company. A second exit is also examined together with independent credit reference checks. It is appreciated that some of this assessment is subjective but the key driver is affordability to repay the debt being provided. In terms of our default record to date, we have had no write offs since launch and we are working with the positions where payments are in arrears. Lenders involved in these loans receive updates in regard to the current position. We acknowledge that we need more transparency in regard the overall portfolio performance and we are currently working on this with a view to addressing this issue in very early course”.

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If you invest through LendingCrowd you should understand that your capital is at risk.

LendingCrowd is the trading name of Edinburgh Alternative Finance Limited, Company Number SC468392, authorised and regulated by the Financial Conduct Authority (Firm reference number 670991). LendingCrowd and its products are not covered by the Financial Services Compensation Scheme.

Read more about the risk involved when investing and borrowing.

The company's registered office is 23 Manor Place, Edinburgh, EH3 7DX.

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