A Beginner's Guide To Investing In Funding Circle

Funding Circle is a platform that connects businesses seeking loans with investors. Investors on the platform purchase interests in business loans originated by Funding Circle by buying promissory notes. The minimum commitment to invest is $25,000, with a minimum amount per note of $500. Funding Circle charges a 1% servicing fee, applied as a 1/12th of 1% monthly fee on unpaid principal balances of outstanding loans. It is important to note that investing in small business loans carries risk, and returns depend on payments received from businesses. While Funding Circle has a credit assessment process, some businesses may not be able to fully repay their loans. To mitigate this risk, investors can diversify their portfolios by investing in multiple businesses through Funding Circle's Auto Invest tool or pick-and-choose marketplace.

Funding Circle's Investor Resources

Funding Circle Investor Resources

Funding Circle has put together a series of resources to help investors better understand its lending platform. These resources include guides on how the platform works, how to use your account, product updates, and advice on investment goals.

How it Works

Funding Circle connects businesses seeking loans with investors. As an investor, you are purchasing interests in business loans originated by Funding Circle. Specifically, you are buying promissory notes issued by the Funding Circle Notes Program, which are dependent on corresponding loans originated by FC Marketplace, LLC.

Investment Requirements

Funding Circle requires a minimum commitment of $25,000 to invest on the marketplace, with a minimum investment amount of $500 per note. At this time, investment is only open to accredited individual and institutional investors. To qualify as an accredited investor, an individual must satisfy certain income or net worth conditions.

Fees

Funding Circle charges a 1% servicing fee, applied as a 1/12th of 1% (0.083%) monthly fee on the unpaid principal balance of outstanding loans. This fee is deducted from borrower payments and there are no additional brokerage account or transactional fees.

Investment Process

After signing up for an account and connecting your bank, Funding Circle will verify your accredited investor status. You can then transfer funds into your investment account, and the Auto Invest tool will automatically invest your money in creditworthy small business loans. Alternatively, you can manually choose individual notes in the pick-and-choose marketplace.

Tracking Performance

The Investor Portal allows you to monitor your investment performance, providing summarized statistics for your portfolio. You will also receive monthly account statements with detailed investment information.

Reinvesting Earnings

By keeping Auto Invest active, your repayments will be continuously reinvested in new loans, helping your interest to compound.

Withdrawing Funds

You can withdraw repayments and any uninvested funds at any time without fees. However, Funding Circle does not currently offer a secondary marketplace, so investors should expect to hold purchased loan parts until maturity.

Auto-bid functions

Funding Circle's auto-bid function is a tool that allows investors to automatically invest their money in creditworthy small business loans. This feature simplifies the investment process by removing the need for manual bidding, which can be time-consuming and challenging for less experienced investors.

Auto-bid provides several benefits to investors. Firstly, it increases the number of loans an investor lends to, thereby lowering the risk of losses. By diversifying across multiple loans, investors can reduce the impact of any single loan default. Additionally, auto-bid helps to ensure that investors' funds are put to work by continuously reinvesting repayments and maintaining a diversified portfolio. This contributes to the compounding of interest over time.

Funding Circle offers two auto-bid options: Balanced and Conservative. The Balanced option allocates funds across all loan risk levels, from A+ to E, resulting in higher return rates but also higher defaults. On the other hand, the Conservative option focuses on higher-quality A+ and A loans, aiming for lower default rates and more stable projected returns.

The auto-bid function also allows investors to specify term and risk band criteria for their investments. It provides transparency by allowing investors to view information about the businesses they are investing in, such as their locations, industries, years in operation, and financial details.

While auto-bid simplifies the investment process and improves diversification, some investors have expressed concerns about the lack of manual bidding. They argue that auto-bidding reduces their ability to actively manage their portfolios and make choices that align with their specific investment strategies.

The risks involved

Investing in Funding Circle can be risky, and investors must be aware of the potential risks involved. Firstly, there is a risk of default or delayed payments by the businesses borrowing loans. If a business is unable to make timely payments or defaults on its loan, investors' returns will be negatively impacted, and they may experience reduced or delayed returns. It is important to remember that not all businesses will be able to fully repay their loans, and investors bear the risk of potential losses.

Secondly, Funding Circle's credit assessment process aims to mitigate risk by assessing borrowers' creditworthiness, but there is still a chance of inaccurate credit information. In some cases, borrowers' credit data may be outdated, incomplete, or inaccurate, which could lead to unexpected defaults or delays in payments. While Funding Circle conducts a holistic credit assessment, there remains a possibility of unforeseen events affecting borrowers' ability to repay their loans.

Thirdly, investing in small business loans through Funding Circle carries regulatory and tax risks. In the United States, Funding Circle's lending operations are subject to federal and state regulations, and investors should be aware of the applicable laws and any potential changes. Additionally, investors are responsible for addressing their specific taxation requirements, and Funding Circle does not withhold any taxes on their behalf.

Furthermore, there is liquidity risk associated with investing in Funding Circle. Investors seeking to withdraw their funds may face delays in selling off their loan parts and getting their money back. This lack of liquidity can impact investors' ability to access their funds promptly. Additionally, Funding Circle does not offer a secondary marketplace in the United States, and investors should expect to hold the purchased loan parts until maturity.

Lastly, economic downturns or adverse external conditions can impact the performance of loans and investor returns. While Funding Circle monitors macroeconomic conditions and performs stress tests to assess potential impacts, there is still a risk of negative consequences during difficult periods. Investors should carefully consider their risk tolerance and diversification strategies before investing.

Funding Circle's credit assessment process

The credit assessment team at Funding Circle employs thousands of data points, innovative technology, and a nuanced understanding of business lending to meticulously evaluate each loan application. This comprehensive analysis enables them to make informed decisions about a business's creditworthiness. The company also takes measures to validate credit data, although it acknowledges that inaccuracies may still occur, potentially impacting the borrower's ability to repay the loan.

To qualify for a loan, businesses must have been operational for a minimum of two years. Funding Circle's due diligence extends beyond mere financial metrics. The company also considers the business's locations, industries, years in operation, and number of employees. Additionally, they scrutinize the financial details and key attributes of the corresponding loans, including coverage ratios, existing debt obligations, and guarantors' credit score ranges.

Tax benefits of P2P loans

Investing in peer-to-peer (P2P) loans can offer tax benefits to entrepreneurs looking to diversify their retirement accounts. Funding Circle, for instance, welcomes investments via traditional and Roth IRAs. For individuals whose current retirement account cannot accommodate P2P loans, opening a self-directed IRA can grant access to tax-free or tax-deferred income.

The interest received from P2P loans is taxable in the same way as any other interest received. If you receive interest without tax deduction, you must notify HMRC of the income and pay the correct amount of tax.

If a P2P loan isn't repaid, you can claim tax relief on the loss. Tax relief is available to P2P lenders who are liable to pay UK Income Tax on their P2P income, make loans through FCA-authorised P2P lending platforms, and are the legal lender when it is agreed that the loan has gone bad. The amount of relief available is the outstanding loan amount from the borrower, less any repayments already received.

Relief for bad debts on P2P loans can only be set against interest received on other P2P loans and cannot be used against any other form of income. If a lender receives relief for a bad debt on a P2P loan that is repaid at a later date, the amount is treated as new P2P income for the lender.

Frequently asked questions