At rebuildingsociety.com, we carefully assess the viability of every loan application that comes our way. To learn more about this process and understand what makes a business the best fit for our community, we’ve interviewed Philip, our lead underwriter and part of our underwriting and credit risk team, so he can answer some frequently asked questions.
1. What do you look for in a business whose application we will accept?
We look for growth in turnover and profitability, good cash management, sound investment decisions from previous borrowings and evidence that the loan from us will strengthen the business for the future. All this should be predicated on true and fair answers to my questions. Sometimes an applicant will not answer my questions truthfully. Difficult to believe, I know, but I assure you it can happen. However, a company that honestly meets the criteria above is highly likely to be listed on the platform.
2. What are some red flags that you often see? What will lead to a rejection?
Any identified deliberate misrepresentation will lead to an immediate refusal, and not treating my questions seriously will not enhance the applicant’s chances of a listing. Sometimes applicants attempt to hide information from us; this is when I ask questions to which I already know the answers. If I do not get the correct answer (often through negligence or incompetence) and I have to ask them to reconsider the answer they have given me, their chance of achieving a listing diminishes. Very often things are blamed on their external accountant. This is because we have no way of testing this advice and certainly no way of holding the accountant to account. However, in my experience, most poor decision making is done contrary to the advice of the accountant and he is a scapegoat when things go wrong. If I believe that the business is being run exclusively for the personal benefit of the directors and shareholders and that a loan from us is likely to be used for their personal benefit rather than to build up the company I will consider a refusal of listing. Likewise, some applicants will insist that audits have been completed or planning consent received when in fact those tasks are still in process. I am also very suspicious of applicants who refuse to file their completed accounts on the public record and say that their accountant has advised them not to do this; I don’t believe a word of it.
3. What accounts do we ask for and why?
We ask to see 2 complete years of statutory accounts which are filed on the public record at Companies House plus a third set of accounts from the beginning of the new financial year to a fairly recent date. This is to give the lenders a short recent history of the business and for them to see what the current position is.
4. What does our underwriting process involve?
I am a bit uncomfortable with describing it as underwriting, a word commonly associated with the insurance industry. A successful journey through the question and answer process that I control does not generate any guarantee or insurance for the lenders. I see my job as forensic accounting because it is an analytical process that attempts to come to a conclusion about the veracity of the accounts and tries to enhance the credibility of the figures and the disclosures so that the lenders have a reasonable basis on which to start their own decision making process.
To assess applications, we use our own risk tool which uses standard financial analysis based upon the critical data in a company’s financial statements to facilitate an overall view of the performance of the company. Specifically the tool looks at the liquidity, profitability and capital adequacy of an applicant; it also allows for an experienced subjective judgment, based upon other factors, to be made about the company and to influence the final decision about whether or not to list the application on the platform. We also use external ratings agencies to bolster our underwriting process.
5. What should lenders keep in mind when reviewing an application?
Lenders should make their own assessment of the application from the information disclosed and the Q&A on the platform. Forensic accounting is not a substitute for their own assessment, it is only an attempt to remove obvious inconsistencies and provide information that a reasonable lender should have a right to see. Lenders should be aware of the significant limitations in accounts generally and that my job can not remove these limitations to any large degree.
6. What is your background and experience?
I am a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and also a barrister (member of the Bar of England and Wales). My career has always been in accountancy and since the time of my qualification in 1981 I have worked in the industry as finance director and in regulation as a member of the secretariat developing accounting standards for the profession. More recently I have spent some years in the teaching and training field. Until June 2015 I was a long standing member of the Council of the ICAEW and the profession’s Ethics Advisory Committee. I helped to develop the risk tool that is an essential part of our underwriting function.
12th Sep, 2016
Unlike some of our competitors, every single loan we list on our platform is backed by at least a Personal Guarantee (PG). Here, we will look at a few common questions about Personal Guarantees.
What is a Personal Guarantee?
In the simplest form, a Personal Guarantee is a guarantee under which an individual agrees to be responsible for the financial obligations of a borrower or debtor to a lender, in the event that the borrower or debtor fails to pay an amount owed to the lender.
Why do we use PGs on every loan?
We want to present you, as our lenders, with the best possible lending opportunities. In order to do this, we ask each Director of the companies we list on the platform to offer a Personal Guarantee in support of their application.
Firstly, this forces each Director to effectively ‘put their money where their mouth is’. We ask them to demonstrate their confidence in their business and their lending proposition by offering their personal financial resources as additional cover should the loan default.
Furthermore, as discussed in a previous post in this series, a key concept of limited companies is the limited liability entailed. This means that Directors are only legally responsible for the debts of their company to the extent of the nominal value of their shares. A Personal Guarantee creates a personal liability for the full loan amount upon each individual guarantor. Crucially, this provides a ‘secondary avenue’ to pursue the amount owed, distinct from the company itself. This can often be a useful avenue when action against the business is not possible, such as if a business exits administration through liquidation with no dividend expected for creditors.
The presence of a PG can also prove useful in situations where the business is still trading, and even in before a loan is even in default.
A Personal Guarantee carries with it the potential of Bankruptcy Proceedings should a Guarantor be unable to repay the debt. Bankruptcy carries restrictions and penalties, which include (among others) acting as a director, setting up or running a company or taking credit above £500.00. In addition, there are a large number of bankruptcy offences which, if convicted of, constitute criminal offences which can be punished by a maximum of 7 years in prison.
The potential penalty of bankruptcy can often form a powerful negotiating tool, and work to steady the mind of a director to prioritise making repayment arrangements in order to avoid the prospect of bankruptcy. This gives our collections team a powerful negotiating tool available on day one of a repayment being late.
Should a loan begin to perform poorly, the existence of a PG can also result in the establishment of a more favourable repayment agreement due to the Guarantor being likely to concede more in order to avoid further legal action and bankruptcy.
How do we enforce a Personal Guarantee?
When a debt is enforced against a Guarantor, they will initially be personally served with a Statutory Demand for the claimed debt. From service, a debtor has 21 days to either settle the debt in full or propose an acceptable repayment schedule. A failure to do this will lead to the commencement of county court proceedings or the presenting of petitions for a Guarantor’s bankruptcy.
Once a Bankruptcy Hearing date has been set, a Debtor has a further opportunity to come to a repayment arrangement (which may involve the submission of an Individual Voluntary Arrangement). Our legal agents attend the hearing on behalf of lenders and will usually petition the court to make a bankruptcy order.
After a Debtor has been declared bankrupt, if the court has appointed one, their estate will vest in a Bankruptcy Trustee, or if not, the Official Receiver. Our legal agents liaise closely with the court, the Bankruptcy Trustee and Insolvency Practitioners during the bankruptcy process in order to secure a dividend for lenders. The bankrupt’s estate is reviewed, the nature of the assets are determined and eventually their estate is liquidated to secure a recovery dividend for the bankrupt’s personal creditors.
Along with the financial dividend paid from the bankrupt estate to creditors, the bankrupt’s conduct is reviewed by the Official Receiver, who investigates and if it is deemed that the Bankrupt has committed any bankruptcy offences, then the court may make the appropriate bankruptcy restriction orders to extend the usual bankruptcy penalties or seek a custodial sentence.
01st Sep, 2016
There is a lot of work which goes on behind the scenes from the point when an application is first submitted until the point at when it goes live on the marketplace.
To give you an idea of the time involved, the borrower team spend an average of nine days on the assessment phase of an application, from the initial submission to listing.
This time is spent analysing the prospective borrower’s submissions, assessing the accounts and security submitted, asking pertinent questions about the business, liaising with the applicant to get more information on their business or additional security to support their application and, when identified, requesting amended accounts in circumstances where accounting errors are spotted, to ensure that the figures presented to lenders are as fair and accurate as possible.
First and foremost, however, a listing must meet our basic lending criteria, and we filter out those that don’t at the first instance. Our five basic criteria are as follows:
1) The applicant must be a limited company.
We do not offer loans to partnerships, sole traders or individuals. Limited companies are by law separate legal entities from their directors or shareholders. This means that there is a clear legal distinction between personal finances and the finances of the business. We can assess the strength of the business purely on its own merits and look at the personal finances of any directors or shareholders separately to assess the suitability of security.
A Limited company is required by law to produce fair and accurate accounts to be filed at Companies House available to the public record every year, along with an Annual Return listing directors and shareholders. This allows us to cross-reference accounts submitted by applicants with those filed at Companies House, an important security check we conduct on every application before listing.
2) The company must have two years or more of trading history.
Recent statistics suggest that up to nine out of every ten start-up businesses will not survive past the first two years. The risk of failure usually reduces after each year of successful trading. We require all businesses we list to have at least two years of prior trading history. This allows us to mitigate the risk of failure by only listing businesses which have already survived the most risky period. It also gives us at least two years of business accounts to assess, and lets our underwriting team get a more accurate idea of the business, adjusting for one unusually good or bad trading year.
3) The business must be profitable and must have a turnover sufficient for our affordability criteria.
As part of our lending criteria, we require that every business we list must have made a profit in the last two years of trading. On top of this, we also use our bespoke risk tool to calculate whether the loan repayments are affordable, taking into account factors such as the business’ turnover, net profit, liquidity and the equity/debt ratio.
4) The business must meet our risk rating requirements.
Along with affordability calculations, our bespoke risk tool also gives each application a risk grade from A+ to F-, factoring in a myriad of criteria from turnover, profitability and growth to liquidity, credit rating, repayment history and creditworthiness.
Any business which scores a D+ or below is rejected. If a business scores C- or higher, should it also meet our security and affordability criteria, it is listed on the marketplace with the appropriate risk rating.
5) The business must also meet our security requirements
Before making it on to the marketplace, businesses must fully satisfy our security requirements, which are considerably higher than most of our competitors. Firstly, unlike some other platforms, all of our loans are backed by Personal Guarantees as a minimum. For any loan request in excess of £50,000, we also require additional security in the form of a Debenture or a Legal Charge over Property.
In addition, in order to try and ensure the greatest prospect of recovery should a loan default, we also require that the total value of all security offered must cover the full loan amount requested. Our underwriters determine the value of each form of security offered by a prospective borrower and should the sum be less than the full loan amount, the borrower will be notified that additional security will be required in order to list.
The above 5 steps are just the first part of underwriting process. Once these initial checks have been done, the application is then pre-approved to undergo further, more stringent assessment.
31st Aug, 2016
We take every measure we can in order to avoid it, but from time to time, a rebuildingsociety.com borrower will fall behind on a repayment. When they do, we have a robust process in place to deal with it.
We know that, when a loan repayment is late, investors value two things: time and information. We have built our repayment process so as to quickly bring an account up to date and to communicate to you the actions we are taking and the reasons for the late repayment.
Many platforms allow a borrower a period of grace before starting to chase a late repayment or recognising it as overdue. We don’t. As soon as a repayment is 1 working day overdue, we start to make contact with the borrower to findout what is wrong, and as soon as we learn anything, we let you know by posting an update in the Loan Updates tab of the application.
All our late payment collection work is managed by a professional and experienced debt collection company, who have specially dedicated team members managing our account.
Day One: Our late repayment team will email and call the borrowers to notify them that a repayment has not been received and to determine why this has happened and when the repayment will be brought up to date. The outcomes of these emails and calls will be passed on to you.
Day Two: Five: If the repayment still has not been received our collections team will call and email the borrower and points of contact again, and continue to do so daily. The borrower will be a warned that late repayment fees and interest will begin to accrue on their account and that these will be due and payable. Any communication with the borrower will be posted on the Updates Tab so that you are kept in the loop .
Day 6 – 10: If by this time the collections team still have been unable to either contact or negotiate a payment plan with the borrower, they will write formally to the directors, to inform them that their account is in arrears and that the loan may become at risk of default.
By this time most late repayments will have been recovered and will not need any further action, however on occasion, we do encounter some loans that progress beyond this stage.
Day 11 – 30: Up to this point the directors and named point of contacts will have been receiving daily calls and emails from the collections team. If no repayment plan is in place at this stage, we will take action to write formally to the guarantors, warning them that the account is arrears and that that it may be at risk of falling into default and becoming immediately payable on demand.
Interest and fees will continue to accrue on any overdue account and will need to be paid to bring a borrower’s account up to date.
Should a repayment not be received after 30 days, micro loan trading on a loan will be suspended. This is our first step to taking further legal action against the borrower. Where a loan is declared a default the account will be passed on to our legal recovery team who will look to call in any security on the loan
To understand the late repayment process more you can view our late repayment flow chart here ( https://www.rebuildingsociety.com/invest/loan-repayment-recovery/)
06th Jul, 2016
When a loan auction is completed, rebuildingsociety.com staff get to work behind the scenes on ensuring that it’s as successful as possible for all parties involved. A huge element of this involves carrying out ongoing monitoring of the active loans on our loanbook.
We focus our energy on this in order to spot any potentially adverse information regarding a business, and pick up on payment trends that may signal either an improvement or decline in the strength of a business. By keeping an eye on this information, we are able to contact the borrower to notify them of information around their business that they may not know about, and we can get in touch with them to see whether they need any assistance or help during what may be a challenging time.
Our monitoring of businesses is ongoing and is made possible by a third-party business data analytics service. All active loans are monitored through this service and changes to the businesses are brought to our attention on a daily basis.
On many occasions, where a County Court Judgement (CCJ) is filed against a business, the business directors themselves are unaware, and so our monitoring of their business allows us to alert them to the adverse information in order that they can adequately respond and take action to protect their business and credit scores.
Aside from this third-party monitoring, we also actively engage with the borrowers to find out more about how their business has been doing and whether they expect any challenges, have faced any recently, or whether they are in need of particular assistance to help their business grow. Unfortunately, not all businesses respond to our engagement, but where they do we post the updates for lenders on the Loan Updates tab of each loan, which can then be read directly from your Dashboard. If you haven’t checked up recently, there may be news about a business you have lent to waiting for your perusal.
Our borrower and investor community is stronger as a group, and will grow stronger and faster through better engagement and interaction between the lenders and borrowers even after a loan has been funded. We encourage lenders to support the businesses they have invested in by buying from them, or recommending them to friend – and, where a borrower is brave enough to ask for assistance, remember that your input could have a valuable impact in helping the business continue to thrive.
24th Jun, 2016
An application has to go through 3 distinct Stages prior to listing and it could be rejected for a number of reasons throughout this period. In the operations team we receive around 40-50 applications and enquiries a month and reject 79% of these. We only allow the strongest applications with appropriate security on to the platform.
We reject 24% of our applications in Stage 1. We filter out any application that does not meet our basic criteria (more on this below) and some applicants choose to withdraw at this stage.
In Stage 2 we gather all of the required information for the application including security information and accurate accounts. This is the longest part of the process as applicants often have to engage their accountants to make edits to their management accounts to bring these in line with our minimum standards and expectations. It is important to us that the accounts are presented to the lenders in both an accurate and comprehensible way. We have 36% of all applications rejected or leaving the process at this stage.
In Stage 3 all of the gathered information is passed to the underwriting team to ask questions about the accounts, assess the risk of loan and to determine its suitability for listing. 15% of all applications are rejected at this stage which represents 37% of the applications that make it to this stage.
The remaining 25% of applications make it to listing, where 2% fail to raise the funds, 2% fail during the completion process and 21% are fully funded and completed.
18% of our rejected borrowers are ineligible and do not meet our basic criteria of turnover, entity, UK based, profitable and able to provide the required accounts.
23% of those rejected meet our criteria, but are rejected by the underwriting team because they do not pass our risk model, or in some way are unsuitable for the site. This includes 6% with insufficient security, 4% where the loan is unaffordable.
14th Jun, 2016
When we receive a loan application, we take it through a number of checks and verifications, and a whole lot of scrutiny, before we allow it to be listed on the platform for your consideration.
These checks focus mainly around the business and its ability to service a loan at the likely rate that it will achieve on the site, as well as taking a look into the business’ previous trading history and the associated businesses linked to it through its directors and shareholders. Much of this information is driven by third-party data services, which use thousands of touch points to bring together a more comprehensive picture of the applicant business.
This information is then used in our bespoke risk tool, and the accounts supplied by the business are further analysed by our underwriters to ultimately determine a risk score between A+ and C. A business can fail in its application at any stage through this process; only 20% of the businesses that apply make it through to listing.
Aside from looking solely at the business, we go a step further and also look at the people behind the businesses. We take into account the businesses they are involved in, and the businesses they may have previously been involved in, as well as their personal credit history.
We do this because we understand that many businesses are strongly driven to success – and sometimes, ultimately, to failure – by the direct actions of their directors and majority shareholders. What’s more, if a business does fail, all loans on rebuildingsociety.com have at least a Personal Guarantee, which means that the directors may ultimately become responsible for the debt of the business should it fail to make its repayments. It is therefore important for us to know more about the directors and their personal financial history, and we do so by carrying out personal credit checks. This data is then used to further our assessment and risking of the business, contributing to the final rating.
Where a director of an applicant business has a poor credit score or has adverse information, their application may well be declined on this basis.
24th May, 2016
We understand that, as an investor, you want to be kept in the loop about what is happening on the loans you have invested in – both whilst the auction is still live, and also throughout the life of the loan.
We also understand that you may have invested in a large number of loans and that keeping track of the latest news on each can become a mammoth task.
That’s why we have implemented a feature that has been requested by many of you to solve just this problem.
You can now, from the ease and comfort of your own Lender Dashboard, view all the recent updates on any loan that you are currently invested in, this includes live loans, active loans on the secondary marketplace as well as any loan that may be in default.
Whenever an update is posted by one of the Rebs team, this will show on your ‘Loan Updates’ tab, right between ‘My Statement’ and ‘Repayments Calendar’. Not only can you see when there is an update, you can also read the full update from your dashboard, saving the need to navigate away.
The Loan Updates section will be used to post a variety of updates, from notifications of an auction extension, to updates on the completion of a loan, to updates from the directors of the business, as well as updates from Rebs as part of its ongoing loan monitoring process.
18th May, 2016
In line with our campaign for improved transparency and communication with lenders, we crunched the numbers on our loanbook to deliver you a picture of the average returns enjoyed by rebuildingsociety lenders.
The data we analysed covers the period between our inception up to the end of the 2015/16 tax year, and takes into account all interest received up to this point, losses relating to bad debt, and expected losses on any under-performing loans. The figures do not include promotional credits or any profit/loss from Microloan Trading.
As always, past returns are not necessarily a guarantee of future performance.
So here are the facts:
- 15.5% AER: If you had placed the same amount on every loan in the said period, your net return would have been 15.5% AER, which compares very favourably with the reported 7.3% AER for one of our largest competitors.
- Security Counts: The most notable impact on returns was the security offered. It will come as no surprise that loans with only a personal guarantee represent our lowest returns for lenders at just 8.88% AER – though still higher than the 7.3% AER reported by our largest competitor.
- Size Matters: Our medium sized loans (£50,001 – £99,999) gave the best returns, narrowly ahead of large loans (£100,000+). This is to be expected given that additional security is required above £50,000, so the medium and large loans are unhampered by the poorer performance of loans backed only by a PG.
- Cream of the Crop: By quite a margin our highest rates of return were offered by loans that were medium sized and backed with property as security.
Want the numbers to sink your teeth into? Download an excel spreadsheet containing the data.
13th May, 2016
Start earning interest straight away. All bids on marketplace loans now attract interest from the day you place your bid (including loans which are currently listed).
Between the 13th May and the end of June 2016 we are running a Summer Special on all current loans on the marketplace as well as any new loans listed between this time.
- All active bids at the close of auction will be credited with interest
- Interest will accrue daily from 13th May 2016. For example, on a 7 day auction, if you bid on day 1 you shall receive 7 days’ interest, if you bid on day 7 you shall receive 1 day’s interest.
- The interest rate earned is the final aggregate loan rate at auction close. All lenders will get the same rate regardless of bid. For example, if you bid 20% at the start of a 7 day auction, are out-bid on the last day and rebid at 18%, you will get 1 days’ interest at the auction close rate which might be, hypothetically speaking 18.64%
- Interest will be paid to each lender at the point the loan is drawn down when funds are sent to the borrower. Interest will only appear on a lender’s dashboard and statement at this point.
- If the loan is not drawn down and is instead cancelled by the potential borrower or rebuildingsociety.com, no interest will be paid.
- If a loan is extended and you withdraw your bid, you will earn no interest for the period your bid was active (as per point 1).
- A ‘day’ ends at midnight, e.g. whether you bid at 9am, 6pm or 11.59pm you will accrue 1 full day’s interest at midnight.
- This is a Summer Special initiative run by rebuildingsociety.com. Interest will be paid by rebuildingsociety.com and not the borrower. The Special will continue until the end of June, at which point it will be reviewed for possible permanent inclusion.
Remember before bidding on any loans you should carry out your own due diligence on the applications and iof you choose to bid, you should do so at risk adjusted rates.
Past returns are not necessarily a guide to future returns. Any unrepaid capital is at risk of arrears or default.