Bad Debts At Crowd2Fund

It wasn't long ago that we compared Crowd2Fund* to Funding Circle. (Read Crowd2Fund Versus Funding Circle: Which Is Better?) Since then, I have been passed an update on bad debts from a colleague.

The proportion of all-time loans that have gone bad at Crowd2Fund (the “default rate”) is now 2.22%. That's four loans out of 180.

Although 180 loans is not a vast amount to go by, 2.22% is very low. That is reassuring and reflects well on Crowd2Fund's abilities to select borrowers. At Crowd2Fund's scale it should be able to be very selective of borrowers at this stage, so its bad debts should be lower than average for a business loans provider. So currently it's fitting the pattern.

However, lenders should expect the proportion of bad loans to rise at Crowd2Fund as more loans become more mature, and as Crowd2Fund grows and matures itself. This is totally normal. As usual, it's for 4thWay and lenders such as yourselves to keep an eye out that the bad debts don't rise too high for the interest rates on offer, or for your appetite to risk. 

So that's four loans out of 180 that are currently bad, and waiting for recoveries. The actual pound amount of bad debts that will arise from those four loans is likely to be less than 2.22%, since the borrowers have already made payments and some debts will be recovered.

Crowd2Fund's CEO Chris Hancock expressed firm confidence about all or most of those loans. He also suggested that lenders should perhaps expect 1% to 2% losses annually, on average. That's low for business loans, although it is just a forecast at this stage.

What more we've learned about Crowd2Fund and bad debts

Crowd2Fund is quicker to call a loan “late” than most P2P lending sites, but slower to say that the loan is “in default”.

Crowd2Fund told 4thWay that it does not call a loan in default until it has issued legal proceedings. That particularly hard step usually occurs after several other efforts to recover a bad debt fail. Each P2P lending site defines defaulted debt differently, but at 4thWay we usually define it as:

• Loans that are over 45 days late.
• Loans that have been re-negotiated.
• Loans that have been passed to in-house recovery teams.
• Any loans that have gone beyond the in-house recovery team stage, e.g. they have been passed to debt-collection agencies, court proceedings have been issued, or any part of the loan has been written off.
• Any loans that don't pass the above criteria but which the P2P lending site itself describes as being “in default” or likely to go into default.
• Loans that are now back on track or fully recovered still count in the default rate (the proportion of loans that have gone bad).

Crowd2Fund's softer definition means that its self-assessed total of four loans that have gone bad could be flattering compared to the default rate 4thWay would give it, if we had enough information to do so.

However, Crowd2Fund has now agreed to start sending 4thWay more details of its loans in future. This could put its transparency equal to Assetz Capital, Funding Circle, Proplend* and some other P2P sites, which should mean that we are kept more up-to-date on Crowd2Fund's record, so we can better understand the risks and more quickly notify you of any changes we spot.

A failing business on Crowd2Fund's exchange?

We recently had an email from one lender who said that one of Crowd2Fund's loans was still available to sell on Crowd2Fund's secondary markets (where lenders can buy and sell existing loans to each other) even though the business owner himself told the lender that his business was closing and that he personally is going to have to be made bankrupt.

Crowd2Fund told us that this very bizarre individual situation is because that business owner is taking some kind of position. Potentially, then, he is looking to get some kind of leverage for a re-negotiation.

We have seen a long email thread between the lender and the CEO, where the CEO holds his ground. It could be real, or it could be a tactic to get better terms.

As of today, the loan is still available to buy secondhand on Crowd2Fund and it is marked simply as “in arrears” (meaning its suffering from late repayments). At least one seller is offering the loan part at a cut price that means you could earn the equivalent of 15% interest, instead of just the original 10% on that loan. It will be interesting to see what happens to that loan and to any lenders who buy it second hand.

Crowd2Fund doesn't allow loans in default on its exchange. But bear in mind that Crowd2Fund won't class loans as in default until it has actually launched legal proceedings, which is later than most P2P lending sites. I think that means some loans that are closer to the brink will inevitably sometimes be on the exchange. If you want to avoid that situation, you should be able to avoid them by not buying any loans marked as “in arrears”.

I'll try to keep you informed about this loan and any similar ones that arise as best as I can. However, better than that, Hancock told us that Crowd2Fund is going to introduce more information for lenders, so that all lenders are kept equally informed about loan situations.

Read our Crowd2Fund Quick Expert Review.

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