The Motley Fool

Did Funding Circle learn nothing from the credit crunch?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close up of newspaper headline for financial crisis news
Image source: Getty Images.

When Funding Circle  (LSE: FCH) listed last year, for many, the future looked bright. We had seen a growth in the peer-to-peer format over more than a decade. Peer-to-peer gambling was well established through exchanges such as Betfair, and the concept of crowdfunding was on everyone’s radar. But this didn’t last long.

Credit crunch all over again

The basic concept of the company is that it matches small businesses that need funding with private individuals who are happy to lend their money. For the borrowers, who were perhaps unable to source cash elsewhere (red flag), they were able to raise money and generally get better loan rates than offered by traditional lenders. For the individuals lending their money, the same was true, their ‘investments’ generally getting better interest rates than regular saving options on offer.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

In order to mitigate the risk of these borrowers defaulting – they are, after all, not always able to meet the standards required by established lenders – the company pools lots of loans together in one big pot. Some of these pots (officially portfolios) are deemed riskier than others perhaps, but the premise is that if you collect enough loans together, the one or two that default are not relevant to the portfolio as a whole.

This is exactly how asset-backed securities and mortgage-backed securities work, and is a concept that proved to be flawed when it turned out that subprime loans had been making up a far larger portion of these securities than anyone realised, triggering the credit crunch and subsequent financial crisis.

People who couldn’t afford mortgages were getting them, these were then packaged together to make them ‘safer’, and then these packages were offered to others (in this case as bonds) as entirely different, and supposedly safer, securities. Sound familiar?

Default position

The similarities have perhaps, already started to show. Funding circle has had to revise-up its expected default rates twice this year, and in April announced it would be winding down its sister fund – Funding Circle SME Income – due to a period of “lower than expected returns”. This entity helps provide funding for its loans.

That said, Funding Circle does seem to be making some efforts to get ahead of things. Over the past year it has moved away from the peer-to-peer model and now seeks to fund much of its lending via other financial institutions. It has also said that it is tightening its lending standards, particularly to riskier businesses.

This could be a prudent course of action, but unfortunately for investors it has also led to the company reducing expectations on Tuesday, cutting its 2019 growth forecast from 40% to just 20% due to these tightening standards and “economic uncertainties“, causing the share price to drop almost 27% at the time of writing.

I feel this shift also raises another question though – if the company is no longer going to be a peer-to-peer lender, then what is it? I am not convinced it will work as an institution-to-individual middleman, and if its lending clients are seeing lower returns and higher defaults, how long will they use the platform? I for one want to know where my money goes when I lend it.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Karl has no positions in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.