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Tuesday, 7 July 2015

Kangaroo Steaks and Funding Circle

With the platforms mentioned in my last post, Ratesetter and Zopa, the websites sort out the borrowers to match the sum you wish to invest. Should a borrower default on a loan then either the Zopa Safeguard Fund or the Ratesetter Provision Fund should ensure you, the lender, aren't out of pocket. This is one of the reasons the lender interest rates are lower on these simpler platforms than sites offering both more decision making and more potential risk.

Here is a simplified breakdown of current UK Peer to Peer lending platforms:
  • Simple:                                For example, Ratesetter/Zopa
  • Intermediate:                      For example, Funding Circle
  • Complex, Asset-based:     For example, Assetz, Savings Stream or Money Thing


Before I introduce you to Funding Circle, 'what about the Kangaroo?', I hear you ask.  One of my many new distractions, since retreating from full-time employment, is cooking. Last night I cooked kangaroo steaks (from Lidl, always a store with surprising tucker.). Fortunately the Internet provides loads of recipes and advice for cooking just about anything. Anyway, the result was unexpectedly superb (even if I do say it myself) and delighted Mrs Ravado (who, until recently was the only cook left in our household).

Roo is an extremely low-fat meat so it’s easy to overcook and dry out. My meat, cut into strips, served over a bed of mash potato, topped with a red current sauce/red wine sauce, was rare in the middle and medium on the outside. Perfection!

Incidentally, cooking is a lot like the current Peer to Peer scene in the UK; lots of ingredients and dishes and loads of opportunities to try new things and enjoy creating unexpectedly satisfying dishes (or, in the PtPL case, a healthy cash return!).

Funding Circle

Enough culinary boasting. Let’s return to PtPL. Funding Circle lends to small businesses rather than individual borrowers. Each borrower is fully identified and there is information about their business plan, history and what the loan is for. The lenders can select loans to bid for and decide how much to bid and what interest rate to offer. This creates an online auction not unlike Ebay.

As the bidding proceeds, the highest interest rate bids are eliminated so at the end of the auction the borrower hopefully gets a rate that meets their expectation. If the overall interest rate is too high then the borrower can reject the loan.

In this model, the risk lies with the lender. Loans are banded from A+ (low risk) to E (High risk) and each band has an expected failure rate. So, for example, an A+ loan for which I bid 10.6% carries a statistical risk of failure of 0.6% (plus a lending fee of 1%) so my actual return, statistically is 9%.


The key thing with FC is to diversify. In other words, spread your cash across many borrowers. People who complain of unexpectedly large losses on FC have usually failed to spread the risk. On this platform, you need to take responsibility for risk. Funding Circle recommends that ideally each loan bid should be 1% or less of your total platform lending. So if I lend £2000 then I should ideally put only £20 on each loan (1% of total invested).

Hopefully that’s enough info to wet your appetite regarding Funding Circle. Each of these platforms provide a good summary of how they work so the best thing to do is tuck in, ie create a free account and make a £20 bid and see how you get on.

In my next post I’ll give you some more information on Funding Circle and introduce the idea of the Secondary Market (one alternative to auctions).

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