The FCA Review of the P2P Industry is expected in the next few weeks. Speculation about what it might say and the recommendations it might make have been rife in recent days. Two of the key issues it is expected to address are the transparency of loan defaults, and the due diligence processes used by platforms to select businesses to feature.
Crowdstacker’s approach to due diligence is methodical and we believe it is unique in the P2P industry. Here we tell you in more detail how it works and what we’re looking for when we aim to choose the best of British business talent.
Different peer to peer lending platforms operate their due diligence processes in different ways.
Some stick to automated credit-checking style systems where most of the safeguarding comes from a simple and straightforward analysis of things like credit history. These methods tend to be employed by platforms which offer the ability to spread your risk by investing in a wider variety of businesses at the same time, and they often offer a reserve fund which can be employed when loans default.
Others, like Crowdstacker, seek protection for investors in a different way. They look instead to undertake the deep dive and decide if the loan opportunity is viable for investors. We aim to supply enough information to investors so they can assess for themselves where/if this investment would sit in their portfolio. And then we offer security packages based on the business and how it can best safeguard the loan.
The Crowdstacker process has three key stages. Only opportunities we believe are viable will make it to the second stage, and only those we believe are the absolute best will make it to the third. Our process aims to ensures we retain only the best, hand-picked selection of investment opportunities for our lenders to choose from.
Stage one: Pre-screening
Pre-screening is simply a way to select the obvious candidates that have a healthy financial track record. It includes:
a) Verification - confirming the identity of the potential company and its directors, including checking for County Court Judgements, directors that have been disqualified and other red flags, as well as Anti Money Laundering checks performed in line with Financial Action Task Force (FATF) guidelines.
b) Automated credit analysis - using a credit scoring model to provide an initial assessment of credit worthiness. The model is one used by the majority of credit insurers and claims to predict around 70% of the defaults in the next 12 months.
Stage two: In depth
This uses ‘Big 4’ accountancy best practices and is performed by a commercial lawyer and chartered accountants with experience of analysing companies of all sizes. This includes:
a) Financial health – an assessment of current and projected financial performance and position. Management and statutory accounts, cash flows, business plans, repayment strategy and existing debt are all considered.
b) Management team – we meet senior management teams at their premises and assess the quality of the team and its operations.
c) Loan structure and conditions - a recommendation is made regarding the loan structure and associated conditions to protect investors.
Stage Three: Credit committee
Our committee which includes accountants, lawyers and business finance specialists is responsible for reviewing all reports and approving each new business proposal.
By the time a business has reached this stage much of the proposed loan structure will have been discussed and a proposal will have been prepared detailing what the company wishes to borrow, why, how it intends to pay it back, and what it can offer as security against it.
The committee’s job is to make the final decision about whether the structure works for investors as well as the borrower. It must also come to an overriding conclusion from the analysis that the business has a strong likelihood of making the repayments with interest.
Only the best of the presented opportunities
There is always risk in investing, but a good investor will assess this risk in the context of their own investment portfolio.
The end goal for all investors should be to achieve a balance which will hopefully maximise the potential for good quality returns.
Crowdstacker aims to be a platform which makes available some of the best investment and lending opportunities. And we work closely with all our business clients to create a relationship which is beneficial for all – investors and clients alike.
Your capital is at risk if you lend to businesses. Lending through Crowdstacker is not covered by the Financial Services Compensation Scheme. Tax treatment is dependent on an individual’s circumstances and may be subject to change in the future. For more information please see our full risk warnings.
Crowdstacker Ltd. is authorised and regulated by the Financial Conduct Authority (frn. 648742).