Stock Brief - Funding Circle (LON:FCH)

5th Nov '21 by Jack Brumby

20 comments 3384 reads

Funding Circle Holdings (LON:FCH) is a peer-to-peer marketplace lender that connects business owners with secured loans and other business financing options.

The fintech company was founded in the aftermath of the global financial crisis, when small businesses struggled to access finance through traditional channels. The group has a lofty ambition to transform the SME borrowing experience by leveraging its technology platform and machine learning capabilities.

It sounds promising, but this disruptive fintech company has had an extremely rocky start to listed life. After listing at a valuation of about £1.5bn in 2018, the market cap collapsed to less than £100m which, at the time, was less than the amount of cash on its balance sheet.

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Such a performance suggests deep skepticism from the market. The truth is that since its formation in 2010, people have questioned the through-cycle viability of the business model here. This disruptive area also brings regulatory risk and a lack of transparency, with many similar businesses failing to last the distance.

And yet, Funding Circle remains. In fact, it has prospered over the past year, playing a vital role in providing funds to small and medium sized enterprises (SMEs).

It was one of the first FinTech platforms to become accredited to PPP in the US and CBILS in the UK. It was then able to provide these emergency loans quickly in pressing circumstances thanks to its recently developed Instant Decision Lending technology.

But how sustainable are the group’s revitalised results, helped as they are by an unprecedented influx of government-backed emergency loans to businesses? These government initiatives are tapering off, which presents a significant strategic challenge.

The StockRank jumped recently from 26 to 79, but whether this is off the back of a one-off boost or a more definitive inflection point in profitability remains to be seen…

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What are the company's principal business activities, how does it generate its revenues?

Funding Circle connects lenders and SME borrowers through its machine learning and technology platform. It originates loans, earns transaction fees on loans advanced to SMEs, and gets ongoing fees after that. External investors provide the funds, so the platform sits in the middle.

Since 2010 it has built up this decision oriented platform which, it says, enables a faster and more customisable borrower experience. Loan applications take an average of six minutes to complete, while…

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andyinbath

5th Nov '21

Worth mentioning (apologies if I missed it in the article) but Funding Circle is no longer a peer-to-peer lending platform. They stopped accepting new lending customers many months ago and now only provide loans through the Government’s Coronavirus Business Interruption Loan Scheme (CBILS).

My experience of using their platform as a lender was not great. The promised returns did not materialise and the number of defaults on loans was huge, completely wiping out my profits from good loans. They clearly had serious issues with their risk assessment process.

WDWombat

Right on andy. Still licking my wounds from losses on lending via this shower.

nemo

Seeing the comments below I am glad I stopped lending money to this company over three years ago, I made a reasonable return before withdrawing my cash.

ezlifeme

Hi nemo. I had money in the peer to peer days. Management of IPO’s have been topic of the week. I couldn’t get my cash out quick enough when this IPO was announced to have no tie in for any employees who all benefited. Huge numbers bailed out immediately and it tanked

battisma

I invested in FC before it floater, and I’ve nearly managed to get all my money out (and a few % on top now) after about 2.5 years after stopping the loans.

My biggest concern about them is their motivation around the quality of the businesses they loan to. As the article states they make most of their revenue from taking fees each month. So if the loan defaults or not it’s not so important to them in the short term at least.

Mark Dale1

I am still getting my cash out - one monthly dribble at a time. I wouldn't touch them with a barge pole.

GrahamF

Similar experience for me as a lender.

Their ability to assess the credit worthiness of borrowers was poor. I made some money from carefully choosing the businesses to lend to and then switched into the property development loans. I also made money there but it became apparent that they were unable to assess the length of time the developments would take with any accuracy and so many of them needed refinancing at some point. I saw the writing on the wall and bailed out.

I would not trust their fly wheel at all. Other lenders have far more ‘economies of experience’ than they do.

Their case as a disruptor was that they didn’t have the same overheads as banks (no branches) and they had all the latest wizz bang tech whereas banks have old inflexible IT systems.

Well these days the banks don’t have many branches left and the IT side of things doesn’t seem to be a competitive advantage.

Barge pole!

large9876

I started to unwind my loans the day a supposedly A+ loan defaulted in its second month!

abtan

Funding Circle Holdings (LON:FCH)

Thanks for the write-up Jack.

I briefly held this one in 2020, but sold out after poor investor relations communications and then realising how slow they were to be accepted onto the CBILS (UK) and PPP (US) schemes relative to competitors.

Since last year, job positions in the US have also been reduced and the the European functions essentially closed down. From memory I think they still served some loans in Germany or Holland.

I didn't hold out much hope for the US business the last time I looked either, which would leave the UK business as the main breadwinner.

The UK has shown some promise over the last 18 months and now claims to be profitable, but there are so many fast growing competitors out there with rapid decision loan products, (such as Upstart (NSQ:UPST) and Open Lending (NMQ:LPRO) - both US based for now), that I wonder what the Funding Circle Holdings (LON:FCH) USP will be in a few years. Even Time Finance (LON:TIME) , a £20m Market Cap company, is setting up its own instant loan decision system.

Anecdotally, and echoing nearly every negative sentiment that appears here, the company prevented a friend from withdrawing his Funding Circle loans last year, without offering any explanation or providing any support - the customer service seemed quite poor during what would have been a difficult time for many people.

If there's one thing in its favour, other than a profitable UK segment, it's that the company appeared to have a lot of cash + collateralised loans on its balance sheet.

This might make the company look quite cheap once the new normal becomes clearer, but for now I remain a cautious bystander.

Thank you again for the analysis.

CamRaid

6th Nov '21

In my opinion Funding Circle Holdings (LON:FCH) was floated with a lot of hype and backing by the likes of Vince Cable.

Importantly, they don't have a loan book. That sits with investors (now institutional investors) so they need to be constantly lending to make their fees.

In terms of reviews, they had dreadful reviews from private investors that they moved away from. Returns were negligible and liquidity was poor. Their good reviews come from those they approve for loans and pay out. These are their clients. Those that get declined and have to deal with their poorly trained staff don't get to the point of being asked for a review. As such not many bother reviewing.

They were desperate to be classed as a fintech business so they could be valued as a tech business at a multiple of revenue rather than as a finance business that values at a multiple of earnings. They achieved that and it has been a downward spiral ever since.

They don't have the recurring income that tech businesses have.

People internally at Funding Circle actually laugh about the tech side of things.

Their expansion in the US has been tough. They struggled to recruit tech staff as they can't pay enough.

Marketing costs are sky high and will likely remain that way if they want to attract new borrowers.

The CBILS scheme bought them time. They actually targeted existing borrowers to refinance their existing loans on to the government backed scheme so they could move away from their personal guarantees and have 12 months without repayments. This allowed them to pay out the pesky retail investors who were complaining and allowed them to get paid again for an arrangement fee. This was paid by the government (the taxpayer).

The CBILS scheme has finished and now they are promoting the Recovery Loan Scheme. This is a damp squib. When CBILS and BBLS were active you could access daily statistics and they were shouting from the rooftops about the numbers. There are no stats for the RLS and I suspect this is because the take up is low and the appetite to lend is low.

This is a business that will struggle to keep growing.

It will likely be bought up by an online bank like Starling but I don't see amazing growth prospects in this over hyped business with a poor business model.

andyinbath - the CBILS scheme is now finished. They are offering the Recovery Loan Scheme or their own loans now. You are right that they don't use retail investors anymore. They used the retail investors as guinea pigs to prove the concept and then ditched them.

An arrogant business with a rather flawed model. They need to keep lending to generate their fees. This costs a fortune in marketing.

I just don't see how they scale this. More countries, more products?

They abandoned their German expansion. The US has been a disaster.

They are not even experts in the loan market so I can't see them doing more complex products such as asset finance or invoice finance. Their market is B2B so I can't see them doing mortgages or personal loans.

I think it is over hyped rubbish.

The staff are probably the worst trained staff in the market.

abtan, I'd give them a very wide berth.

Abtan, at least Time Finance (LON:TIME) have their own book and offer a diverse range of lucrative business finance products. Funding Circle Holdings (LON:FCH) are a one trick pony and the trick is not that great.

23rd Jan '22

A rise in bad debts are expected. Hardly surprising when lending for no real purpose with no real security.

https://www.p2pfinancenews.co....

Roodini

25th Jan '22

Similar experience. The default rates are huge.
Mira an easy target for people wanting money to instantly default on.
when I see Funding Circle all I can think of if the Big Short and the pile of Jenga blocks.

“Zero….. they are going to zero”

24th May '22

This is now down 36% following my posts below.

They had a flash in the pan boost from CBILS loans. They will have a reduced boost from the RLS loans. From there I don't know where they can go.

The model is not a recurring revenue model. Customers are not queuing up to renew. They are using third party marketing agencies to contact previous borrowers.

Their asset is the data they have acquired and some algorithms which have been fine tuned over time.

As a stand alone business I don't see it has a future. Maybe a target at a lower price for a Starling bank type business but arguably they have enough reach and know how not to need FCH.

I too put some money into their pot a few years ago. I was feeling flush and thought why not, try it out!

As you said the quality of the unsecured loans is not good, even during the boom time a few years ago the default rate is huge.

I think if you could fog a mirror you can get a loan from these guys. Selling Sand to Saudi - great business plan. Ice cream to Eskimo’s - new unicorn potential.

When the economy rolls over in the next few years, my guess is MOST of the loans will default and almost everyone gets a major haircut.

”this risk assessment process”

6th Sep '22

The outlook for this business is poor.

The uncertainty in the business community will make business finance popular. However, the increased costs of energy, etc.. will make affordability hard to predict.

Many businesses also have a glut of loans after CBILS and BBLS.

The only saviour I can see is if there is a new loan scheme with government support. It may be one that allows businesses to extend their borrowings over a longer term so it reduces the cash flow pressures by reducing repayments. A repayment holiday would also be a good option. I can't see that happening.

As such I am not certain FCH have a serviceable market.

Stock Brief - Funding Circle (LON:FCH)

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Jack Brumby

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