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Sourced Capital Review
Much more substantial information and data is needed.
Sourced Capital's Bridging & Development loans are currently unrated, due to not enough information being provided.
This account has been paying lenders in the region of 10%-12% interest after bad debts.
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What is Sourced Capital?
Sourced Capital does loans to UK property developers. The loans are usually to develop the property, but they can include part of the cost to acquire the land or to support developers while they seek buyers for their developed properties. Sourced Capital targets returns for lenders of 10%-12%, before bad debts.
When did Sourced Capital start?
Sourced Capital opened its P2P arm in mid-2019. Its total lending is now around £50 million, including some millions in test loans prior to opening.
What interesting or unique points does it have?
We always like to see P2P lending companies that are highly focused on one type of lending, especially with development lending, which is unlike any other. While Sourced has other parts to its business that are involved in property in other ways, its P2P lending platform is purely for development lending.
Sourced Capital has its own ecosystem. All or most of its borrowers are Sourced franchisees that commit to receive education, support and tailored advice in taking their development projects profitably from start to finish. Some franchisees are experienced, but appreciate the support, in particular when it comes to arranging the financial aspects, which is often the biggest headache.
Sourced is obligated to support franchisees every step of the way, which should help improve the success rate of developments for their less experienced borrowers. This ecosystem also offers potential pricing advantages when it comes to setting lending interest rates for the borrowers, who are already Sourced customers and work regularly with Sourced.
Sourced Capital is for either high-net-worth investors or for lenders accepted as sophisticated by the regulator, which includes anyone who has already lent in two P2P loans and/or two P2P lending accounts in the past two years.
Sourced Capital review: how good are its loans?
Sourced Capital no longer provides easy access to its key people nor provides data to 4thWay, so what we knew is now substantially out of date.
The last we were told is that the maximum that a borrower is allowed to borrow initially is 70% of the starting property value. And the maximum that the borrower can borrow over the course of the development is 70% of the expected sale price.
These are good core standards that it’s hopefully sticking to.
Lenders in Sourced loans are always first in line to be repaid in the event that a loan turns bad and the property needs to be repossessed and sold. This is a very solid basis for lending and a tighter standard than many property P2P lending companies.
Sourced Capital last told us it aims to get at least 20% of the project funded by the developers themselves. That’s good, but an aim is not a minimum, so lenders need to watch for how much skin their developers have in the game.
You also need to watch for the developer’s profit too, which is one indicator of the risk level. Sourced looks for projects that are projected to make a 20% profit for developers, but, in supporting its franchisees in London, expected profit can sometimes be as low as 12%, it once told us, which is getting more on the low side than I feel totally comfortable with. That’s especially the case in loans where developers have funded a smaller amount for themselves, so keep an eye on that when reviewing loans.
It’s too early to say anything about the number of loans that will turn bad and where official debt recovery will need to take place.
How much experience do Sourced Capital’s key people have?
Sourced Capital told us its directors have 30 years’ relevant experience. We’ve not yet been able to verify that much of the experience was highly concentrated on property, or that it involves development, development lending or credit policy on development lending.
The founder-CEO has the most demonstrable path in this regard and is likely to have acquired quite a lot of relevant knowledge over a decade or more of intense work in the property space, although not in lending. He’s also adaptable, switched on and likely to learn fast, but his gift for salesmanship makes him harder to read.
Sourced has, at least in the past, got some external advice from the former head of credit at Assetz Capital, which is highly relevant, although it seems likely his involvement is or was limited.
It also briefly benefited from the experience of Stephen Wallis, the former head of credit for Rebuildingsociety. While Rebuildingsociety did not do full-on development lending, we believe its former head to be conscientious of standards.
Sourced has briefly told us it has two full-time quantity surveyors, although we have no details about them and they’re not listed on the Sourced Capital website. Nevertheless, it always (appropriately) hires external, independent surveyors for developments, which is more important.
Sourced has its own development arm and it is training developers every week, so certainly developers are being convinced about Sourced’s knowledge and capability. We have not had contact with franchisees and can’t gauge satisfaction levels at this time. It’s often the way with new P2P lending companies that they simply need to build a good lending record to prove their ability.
This is an extraordinarily ambitious company, as revealed in particular by its main founder’s entrepreneurial history as well as its own, ongoing £150 million development in Manchester, namely Regent Plaza. (I have no information on how that development is doing.)
Ambition is a trait to watch: while it can lead to a substantial, stable P2P lending company, it can also coincide with biting off more you can chew, or stretching for rapid growth at a cost of quality loans.
Sourced Capital review: lending processes
Sourced has an interesting points system for franchisees, which can borrow more or less money depending on points scored – provided they also make it through the loan application assessment. Points are earned based on the franchisee’s level of development experience, on attending Sourced training courses, on previous development sales, and more.
Any borrower scoring system started from scratch needs plenty of time to test. As it’s not verifiable for outsiders, it will probably take some more years before the results filter through to the general public.
We have not been able to reassess Sourced Capital’s lending process for many years, but here is an outline of how it worked.
On top of its franchisee scoring system, Sourced considers each loan application in detail. Sourced claims to have a very strong commitment to the key ratios and numbers that are essential in good development lending.
Sourced Capital takes substantial steps to confirm a borrower’s successful completion of prior developments and extensively reviews the borrower, the borrower’s legal structure, the project, the builder, the builder’s capacity, and the exit.
Sourced’s many stage assessment covers what we’d expect to see. It looks into the borrower’s exit strategy and, in best practice, considers and tests at least two other ways that the loan could be repaid (such as the borrower paying off the loan by borrowing elsewhere and a sale of the property to investors at a discount.)
The last we were told, the entire amount needed is raised in advance and paid out to the borrower in stages, as and when an independent monitoring surveyor finds that it has completed a phase of the project as planned. Raising all the money in advance is best practice, as it means that the project can’t stall if the borrower is unable to raise more money mid-way through the project.
Sourced is one of very few P2P development lending companies that raises the entire project funding in advance. A feature that’s not to be underestimated.
Ideally, Sourced would add in quality-control checks for the monitoring surveyors themselves, using its two in-house surveyors.
Sourced is incentivised to help and advise the borrower with the development every step of the way, since the borrower is also a franchisee customer.
The credit committee is a sensible mix of people. It decides whether to lend by a majority vote. Although on balance I prefer to see loans succeeding by unanimous vote, in the end it comes down to rigorous application of lending criteria, which will ultimately be seen in Sourced’s results.
What we’d ideally like to see is a greater interest in detailed numerical analysis and figures.
I don’t know if Sourced’s bad-debt collections policy has been tested. Some loans have fallen late and been extended, but I don’t know if any have ever gone into default or whether any borrowers have otherwise failed to keep important contractual terms.
How good are Sourced Capital’s interest rates, bad debts and margin of safety?
Lending interest rates are usually 10%, although they reach 12% if you lend £20,000+ in a loan. Considering Sourced potentially allows less experienced borrowers, these double-digit interest rates are appropriate. However, Sourced Capital did not increase its borrowing and lending rates alongside inflation, as most other P2P lending providers did.
Sourced has some franchisees who are prepared to pay a premium interest rate in return for not having to deal with the headache of securing funding elsewhere. Some interest rates might therefore turn out to be very generous to lenders.
While I don’t know if there have been any bad debts, Sourced once forecast 1% losses. But forecasting is not easy at this stage due to lack of history, and we haven’t seen Sourced’s forecasting models. 1% is very low for interest rates of 10%+, although it has been done in P2P lending.
Has Sourced Capital provided enough information to assess the risks?
Sourced Capital initially provided a huge amount of access and information to 4thWay when we first assessed it in 2020.
In mid-2022, it provided a much needed mini update, although no data was provided to back it up.
It no longer provides any information or data to 4thWay, so it’s not possible to assess whether its interest rates give you a decent margin of safety.
Regarding transparency direct to potential lenders, Sourced is very sparing on its website in details about its people, processes, loan book and results, providing limited data.
Its sales script has included several bold claims without evidence. To take one example, it once stated that it’s already the largest property investor network in the UK. Sourced is a very new business, so it needs to substantiate that its network is larger than the 75,000-strong Property Investors Network, formed in 2003, which does 50 network meetings a month.
It is a company that is very big on sales talk, and that makes it harder to drill down to the facts and seek out evidence.
To take one example, it once stated that it has 100 offices, but it turns out it’s referring to 100 franchisees. This very loose way of speaking is common business marketing practice in all industries. And so-called “hustle” is standard procedure for growing a new business and even admired in entrepreneur circles. But it make it less easy to distinguish what’s actually happening, what actual skills and experience the people have, and so on.
What is a little bit concerning is that I personally can’t find the documents that the financial regulator requires it to publish on its website, called “outcomes statements”. While the information in them is basic and not verifiable, and therefore can’t be used for any assessment of the risks, you still expect to see it.
The last I checked, Sourced did a lot better in its individual reports on loan opportunities when you sign up and look at its full assessment of each loan. These reports explain the opportunity with a lot of detail and clarity, which is entirely appropriate and indeed essential for lenders. On top of that, lenders can submit questions to both the borrowers and to Sourced about each lending opportunity, and you can attend webinars about them. So the bottom line is to ignore the sales pitch and focus on the details of the lending opportunities.
Due to Sourced’s unique ecosystem, what I’d also like to see in future is broad, substantial evidence of high, widespread satisfaction levels among the franchisees.
Is Sourced Capital profitable?
Sourced once told us it was looking to reach profitability in five years of trading.
It’s not possible to review Sourced’s financial situation, because publicly available information regarding its franchisee revenue, the financial structure of its own large development and its overall results, is limited.
Its web of businesses with few public details makes it impossible to track what’s going on. For example, one of the connected businesses appears to have possibly turned a profit in its last published accounts, possibly of hundreds of thousands, while another seems, possibly, to have made an even greater loss.
Many connected businesses can be quite normal in the property industry and in property lending, and few published details is also normal for small businesses, but 4thWay is not in the position to verify anything.
What can you tell me about Sourced Capital’s cybersecurity?
4thWay previously found at least one of Sourced’s public websites was infected with malware.
According to a new, soft scan from 4thWay’s security provider, Sucuri, no new malware has been detected. However, some behaviour of the site in relation to bots might possibly involve malware, but only because that behaviour is most often (but certainly not always) caused by malware.
The website is however listed as clean by Google Sage Browsing, McAfee and Yandex and it carries a valid security certificate.
Aside from that, Sourced Capital’s public website could probably do with a little security tidying in terms of security to prevent attacks or leaks.
More importantly, a broad, arm’s length scan finds that the website partitioned to provide the actual P2P lending platform that you log into appears to be up-to-date and low risk. 4thWay has never found any substantial cybersecurity concerns in its actual lending platform.
What is Sourced Capital’s minimum lending amount and how many loans can I lend in?
The minimum you can lend is £1,000. You need to choose your own loans. I don’t know if there are many to choose from, but you could drip your money in over the course of a year to spread across a larger number of them.
Does Sourced Capital have an IFISA?
Sourced Capital’s loans are available in an IFISA.
Can I sell Sourced Capital loans to exit early?
No.
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Sourced Capital: key details
4thWay PLUS Rating
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Interest rate after bad debt
Here we show the P2P lending site's own estimate (or 4thWay's if theirs are not appropriate)
4thWay Risk Score
Lower Risk Scores are better. How is this different to the 4thWay PLUS Rating?
Description
£50 m since 2019 in loans to property developers. Available in an IFISA. Showing Sourced's forecast interest rate if you lend under £20k/loan. SOPHISTICATED/ WEALTHY INVESTORS ONLY
Minimum lending amount
Exit fees - if you sell loans before borrowers fully repay
Early exit is not guaranteed. Usually, other lenders need to buy your loans
Do you get all your money back if you exit early?
Loan size compared to security value
Reserve fund size as % of outstanding loans
Company/directors lend alongside you/first loss
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