Changes to the Marketplace

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Kylie Greeff
24th October 2016

changeWe’ve been working hard to bring you good quality borrowing applications for you to consider. Currently businesses that are eligible to borrow through rebuildingsociety.com, must have at least two years history, an average turnover of £50,000 a quarter and offer at least a personal guarantee as security. The average final rate paid by borrowers on our loan book is over 20% APR*, this rate is paid usually regardless of the security offered in support of the loan.

Currently, the risk rating given to the borrower drives the maximum starting rate for bids. To incentivise applicant borrowers to offer more or better security we are introducing a modifier to the maximum rate ceiling on the loan auction.

Whilst we currently take security into account during the underwriting process, it is not a significant factor in determining the risk rating given to the borrower, and therefore has little bearing on the cost of the finance.

From the 26th October 2016, the starting rate on a loan will be driven by the security strength and Loan To Value (LTV) score of the security rather than the final risk rating. The underwriting of the loan will be done in the same manner as before and risk ratings between A+ and C will continue. The weightings attributed to the determination of the Risk Rating in our model will remain unchanged, therefore a loan that was rated as C risk earlier, will still be rated as a C rated loan, allowing you still to view the suggested relative risk of the business.

The Changes in Practice

What is it?

A new borrower incentive to encourage borrowers to offer more and better security in support of their loan.

How does it work?

The borrower can offer a wide variety of security to support their loan. We’ve assigned a nominal value to the different types of security, making some security ‘more valuable’ than others. For example a 1st charge on a property will be deemed a more valuable form of security than a company debenture, and as such they will be rewarded with a lower starting interest rate.
The more security added, the more the starting rate will be reduced* as the security added works in a cumulative way linked to the loan to value ratio.
The starting maximum rate will never be modified lower than 5% of the standard maximum rates, which are currently as follows:

  • A+ = Max rate 11%
  • A= Max rate 14%
  • B= Max rate 17%
  • C= Max rate 20%

Therefore a C rated loan will never have a maximum starting rate of less than 15%.

The security we can accept from a borrower is ranked in priority below.

  • 1st Charge Commercial Property
  • 1st Charge Non Residential Property
  • 2nd Charge Commercial Property
  • 2nd Charge Non Residential Property
  • 1st Charge Residential Property
  • Fixed Asset Debenture
  • 2nd Charge Residential Property
  • All Assets Fixed and Floating Debenture
  • Corporate Guarantee
  • Personal Guarantee Insurance

Therefore, depending on the LTV on the security, a 1st legal charge taken on a commercial property in support of a loan will be ranked higher than a loan with an All Assets Debenture and may be achieve a lower maximum loan rate. Similarly, based on the above a loan secured on a 1st charge non residential property with an exceptional LTV will not achieve a better rate than a loan secured on a 1st commercial charge that also has an exceptional LTV, unless the former is accompanied by additional security.

Personal Guarantee’s do not qualify for a reduction in the interest rate as this is a mandatory requirement for all loans.

Why are we introducing it?

We have received feedback that the security being offered should have a more direct effect on the rate of loans. As such, we are rewarding borrowers who choose to back their loan with additional security. In the long run this should result in a higher percentage of secured loans and an increased rate of recovery.

When will it be introduced?

The security discount will apply to all new loans from Wednesday 26th October 2016.

How will this affect you and your use of the site?

The bidding process of the site remains unchanged as does indicative risk rating given to each loan, the only change will be the maximum starting rate of any loan that achieves the reward.

Will this be applied to historic loans?

No, but existing borrowers who reapply for new finance may qualify for the ceiling rate reduction.

Will this reduce my returns?

We expect any reduction in average gross returns to be offset by an improvement in net returns.

As ever you should always review each loan application in detail before lending. Where you have questions in regard to an application you should put these to the borrower via the discussion forum on each application.

If you have not already done so, please read more about the risks associated with lending to businesses.

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