By Daniel Lanyon on Thursday 29 September 2022
With an ever-worsening sentiment among consumers and businesses, lenders face a difficult time ahead but one of the most prominent fintechs is gearing up for long-term growth.
In 2022 everything that could go wrong, economically speaking, has occurred. A UK central bank crisis is now being added to sky-high inflation, a plummeting stock market, supply disruption threat of a global war and drought.
The UK's small and medium-sized businesses (SMEs) face a tough winter ahead. The pandemic, Brexit, late payments and rising inflation, have all contributed to a rising wall of worry for SMEs. Nearly two-thirds (61 per cent) of SMEs are struggling to pay back loans, according to a study from Dun & Bradstreet, with more still (69 per cent) of all SMEs surveyed having applied for extra funding in the past two years, compared to just 48 per cent in 2018 and 2019.
For Lisa Jacobs, CEO of the listed-fintech lender Funding Circle, whose loans power tens of thousands of SMEs in the UK and US since January of 2022, this means taking an increasingly cautious approach which includes lowering lending volumes whilst still gearing to grow the business over the medium term.
“If you look at our portfolio today we have not seen any signs of stress…we've not seen any increase in delinquencies,” Jacobs told AltFi in an interview. earlier in September.
Funding Circle’s historical cohorts are performing well with its ‘late book’ only at about a fifth of its peak during the pandemic, she says.
“We are cognizant of what's coming down the track, we read the press, we read the forecast that there's going to be a recession in 2022, which will lead into 2023,” Jacobs said.
“Obviously, there'll be high inflation and interest rates will rise over that period. So that's the macroeconomic stress that we've applied to our forward-looking view, which leads us to take more a more prudent approach and decrease originations,” Jacobs added.
The lender’s latest results, published earlier this month, showed Funding Circle turned a £1.5m profit during the first six months of 2022. This represents a sharp fall compared with its £35m profit in the first half of 2021.
This was largely due to loan originations dropping by c.51 per cent to £803m compared with £1.6bn for the same period last year when the company was in the middle of government-backed loan provision schemes such as CBILs.
While the macro picture deteriorates Funding Circle is still managing to attract new investor cash, however.
Its latest deal is worth £700m, with the money coming from US-based Bayview Asset Management. The cash brings its will be lent through Funding Circle's platform to UK small businesses over an 18-month period and follows a £1bn deal with another US-based asset manager earlier this year. In total £2.4bn of funding has now been committed by investors to lend since May.
“We continue to prove out the platform mode and the resilience of our risk models, we've upgraded the returns across most of our historic cohorts in the UK are delivering that 5 per cent average net return to investors over all the historic cohorts. In the US, it's 5.5 per cent. So we continue to see that really strong performance, which is why we've been able to continue to attract investor funding through the platform for both the UK and the US,” Jacobs said.
New products, new growth
With plenty of lending firepower from investors hungry for yield from SME loans, Jacobs says the business still sees “good growth opportunities” outside of its core term loan product.
“The advantage that we have is we can be nimble. We can make sure that we are changing our risk models in response to what we see in the environment and we'll continue to look for opportunities to support small businesses,” Jacobs said,
One area, in particular, that is raising eyebrows is its new Flexipay product, a type of BNPL loan for businesses.
With the product, SME customers can pay their supplier with credit facilities of between £2,000 and £30,000 and then spread the cost out over three months. They get charged a 3 per cent one-off fee.
“We've done £30m in total in drawdown [with Flexipay]. That has tripled from when we went to market in March,” Jacobs said.
“It's very much being used on a frequent basis, our active users are doing 1.5 transactions a month. So it's seen really good engagement. For me, a couple of the things that I was looking for with this product was that level of engagement, which is better than we had initially anticipated. And secondly that it could be used alongside our term loan and could be complementary to that. It's very exciting but it's still early days.
Funding Circle is currently ramping up Flexipay and will be launching in beta a dedicated card at the end of the year.
Another front of its growth plans is lending to US small businesses, a market that the lender has been involved with for a number of years but one that was hit by covid disruption.
“We have seen a huge growth in the US market…and now seeing the momentum coming through. We've also been working on lending as a service,” Jacobs said.
“It's very nascent, but we see it as an important distribution channel going forward, given the difference in the US makeup and the more fragmented nature of the banking market, overall, we are very excited about the options that both sides play in the US as part of our medium-term plan,” Jacobs said.