Understanding Risk

The Risks of Lending To Small Businesses

Investing money through Peer Funding Limited means you are lending directly to UK registered small and medium sized businesses. Your capital is at risk and it is possible that money invested could be lost.

Peer Funding Limited is not a bank. Investing money is not a guarantee of return, and past performance is not an indication of future returns. Some borrowers may default, either partially or completely, on their repayments.

Although Peer Funding operates a Secondary Market where it is possible to sell invested loan parts, there is no guarantee for any invested loan, especially if the Borrower has a late payment history, that other investors will be interested or available to purchase loan parts placed for sale.

Peer Funding Limited will hold client funds in a segregated clients’ bank account away from our own funds. The Peer Funding clients’ account is not part of the Financial Services Compensation Scheme.

If you are at all unsure of your commitment, we advocate that prior to investing you seek independent financial advice.

 

Borrower Due Diligence

In the Marketplace you will see information relevant to the business and the Borrower’s reasoning for their loan application. The information provided is sourced from credit reference agencies and Companies House and is not filtered or interpreted. Peer Funding do not offer advice or recommendation whether an investor should invest in a particular loan or not.

Note: It is important that for each investment decision you have carried out your own research, reviewed the Borrower’s financial performance and satisfied yourself that the investment meets your criteria.

 

Risk Bands

Borrower credit score information is provided by Graydon UK which includes a rating from 1-100 (with 100 being the very best risk score) and a likelihood indication of the business failing within the next 12 months, expressed as a percentage. Graydon UK use accurate, relevant, up-to-date corporate and public data alongside behavioural performance intelligence to determine their credit and risk of failure information.

Peer Funding group borrowers into Risk Bands from A+ to C- based upon the Graydon UK credit score for companies with a credit score of 50 or above. Each Risk Band has an average likelihood indication of the business failing within the next 12 months, expressed as a percentage, as follows:

Risk Band Risk of Loss
A+ 0.6%
A 1.3%
B 2.5%
C 3.7%
C- 8.4%

Risk of Loss percentage is the likelihood of a business failing within the next 12 months

Example: an investor who invests evenly across 100 loans in risk band B would as an annual default rate expect 2.5% of businesses in which they’ve invested to fail.

It is important that the likelihood of business failure information is taken into account when making an investment decision. It should be noted that the performance of a business can improve or worsen, and past Borrower performance is not a guarantee of future performance.

Note: As an individual investor you must make yourself aware of all aspects when making an investment decision. The information provided is not a guarantee of business performance and likelihood of failure rates are only an indication of future performance.

Risk of loss information will be supplemented by real loan performance data, once available, in the form of borrower late payment, default and bad debt statistics.

 

Calculating a rate of return

When calculating a rate of return, deciding on the amount to invest and where to set the interest rate you should take into consideration Risk of Loss, Peer Funding fees and payment default information before submitting a bid.

The Risk of Loss percentage should be used as a guide to the estimated Bad Debt performance on a year-on-year basis. Use this information to help estimate your return before tax.
Credit Rating 1-100

The Credit Profile information in the Marketplace includes a Borrower Credit Rating supplied by Graydon UK which scores companies between 1 and 100, with a score of 100 being the very best. Peer Funding A+ to C- Risk Bands are linked directly to Graydon UK credit score information, with A+ at the higher end of the scale and C- at the lower end.

Peer Funding Risk Bands correlate to Graydon UK credit scores of between 50 – 100. Peer Funding does not normally list opportunities with a Graydon UK credit score of less than 50.

Note: A credit rating is an indicator of past performance when ranked against similar companies and is no guarantee of future performance.

The credit information sourced from Graydon UK also shows a graph of mean credit score per quarter of subject relative to industry grouping.
Supporting Documents

Where documents are required to support the borrowing application, they will be available for download in the ‘Supporting Documents’ section of the Marketplace.

It is important to review this information as it is relevant to the borrowing request and should form part of a balanced investment decision.

The information provided in these documents is intended to be factual and balanced.
Ask a Question

This is your opportunity to ask a question directly to the Borrower. It is only the Borrower or their Professional Advisor that will answer the question.

Use this section to make sure you have fully understood the borrowing request to assist in deciding whether this investment meets your own risk/reward criteria.
Investment Liquidity

Once you have invested in a loan you may not be able to access your money until the loan is repaid in full at the end of the term. This is particularly relevant to interest only property development and bridging loans where none of your capital is returned until the loan is repaid.

It is possible to list all or part of a loan for sale on the Secondary Market. However the sale of any loan part is dependent upon there being a willing buyer at the sale price. The nature of any loan should therefore be considered illiquid until a willing buyer is found.
Late Payment, Default and Bad Debt

Once a loan has been funded we track the repayment performance regularly and pursue any late repayments promptly on your behalf. Any payment that is more than 3 calendar days overdue is classed as a Late Payment.

Note: Not all Borrowers will make timely loan repayments and some will fail to make all repayments. A loan will be classified as in default when:

* Secured and Unsecured Loans – when 3 or more payments have been missed
* Selective and Debtor Invoice Finance Loans – when repayment is more than 45 days overdue
* Property and Bridging Loans – when repayment is more than 90 days overdue

A loan may be classed as in default earlier if information is available to suggest that a business cannot continue to meet its liabilities.

In the event of a loan default, Peer Funding will start a recovery process on your behalf, including working with business owners, employing collection agents and ultimately calling upon any security held against the loan, through our sister company Peer Funding Trustee Limited, which holds securities on your behalf.

We must warn you that, in some cases, we may not be able to recover some or all of your investment, and you should not invest money that you cannot ultimately afford to lose.

A loan is classed as a bad debt when all possible action to recover the funds, including legal action and realisation of any security, has taken place and there is no further realistic prospect of recovery.

Historical loan performance for each Risk Band, late payment, default and bad debt rates are to be published once available.
Building a Balanced Portfolio

Peer Funding recommends that you look to diverse your investment funds across a broad spread of different businesses and/or across different loan products. By doing this it is possible to reduce the impact of any late payments or bad debts on your overall investment returns.

Peer Funding allows you to build a balanced portfolio by:

* recommending your investment in any single loan is restricted to no more than 20% of the borrowing request
* allowing you to invest amounts from as low as £25 upwards

If you therefore decided to invest the minimum amount across different loans, then an investment pot of £2000 would enable you to spread your risk across 80 different loans, thereby significantly diminishing the impact of a bad debt on one or two of your investments on the overall investment returns of your total investment pot.
Secondary Market

Buying Loan Parts: You are able to buy loan parts for sale from other investors at any time on the secondary market and this is a way of building and diversifying your portfolio quickly. You should be aware that some of the loan parts appearing on the Secondary Market may have been listed as they are causing concern, and you should carry out your own due diligence and seek independent advice if you are unsure whether to invest.  There is a potential loss of future expected interest if any loan parts were to be repaid early, and you have bought at a premium. Borrower credit information and past performance is not a guarantee of future performance and your capital is at risk. For details of how the secondary market works, please see your Investor Welcome Pack.

Exiting Your Investment: You can exit all or part of your investment at any time by selling loan parts on the secondary market.  The sale of any loan part is not guaranteed and is dependent on a willing buyer at the price that you want to achieve. If your loan part does not sell, you will not be able to access your money until the loan is repaid. For details of how the secondary market works, please see your Investor Welcome Pack.
Taxation

Peer Funding Limited pays all returns on investment without any tax deducted. Tax is not deducted ‘at source’, and Investors are responsible for the payment of any tax due of them to HM Revenue & Customs (HMRC). Tax will be payable at your marginal rate. If you do not currently complete a tax return you will be required to do so if you have a tax liability. We are unable to offer specific tax advice and recommend that you consult a tax adviser or your tax office if you are uncertain about the treatment of your investment returns.

Detailed information of your tax liability, your Personal Savings Allowance and Bad Debt Relief for Peer to Peer investments is available on the HMRC website.
Security

Peer Funding Limited offers a mixture of secured and unsecured lending opportunities for investors on the platform. It will be clear from the Marketplace listing for each opportunity whether a loan is secured and which security is in place.

We look to take personal guarantees from borrowing directors for all opportunities, details of which will appear in the security section of each marketplace listing. Additional security can give investors greater comfort when making investments in borrowing applications and we take security in different forms across our secured product types.

Where Peer Funding takes security over an asset such as property, the asset will be independently professionally valued on behalf of the investors. Where security is taken over the assets of a company, the latest balance sheet value from the borrowers published accounts will be used.

Security can reduce the risk of loss in the event of a default as we have additional leverage should a borrower default on their repayment commitments. We can call upon the security to make up any shortfall emerging in the case of a bad debt.

Note: It is the intention that there will be sufficient value in the security to cover the outstanding borrowing. However, there is no guarantee and whilst realisation of security may not always fully meet the amounts owing, it can help mitigate the risk of loss for investors.

Security is held in the name of our sister company, Peer Funding Trustee Limited, who hold the security as trustee for the investors and at ‘arm’s length’ from Peer Funding Limited. In the event that Peer Funding Limited ceased to operate, the security would continue to be held separately for the benefit of the investors to secure outstanding loans, which would be managed in accordance with our wind down procedure.
Forms of Security

Secured Business Loans – Charges taken over fixed assets of the borrowing company in the form of property, equipment or other tangible assets with realisable value.
Property Loans [bridging & development] – Usually security is in the form of a first charge over the property and/or land involved in the borrowing
Invoice Finance [selective & debtor] – A fixed charge over the specific invoice from the borrower’s sales ledger, by way of assignment