Over the last six months we have, as a company, purposely taken a cautious approach to lending, adjusting our credit assessment process to allow for the economic uncertainty and turbulence, so as to ensure continued strong average lender net returns. This has resulted in fewer loan applications making it on to the marketplace for lenders.
That said, we have good news to share with you. You’ll soon be seeing an increase in the number of loan applications on the Primary Marketplace as we add a new product and process focused on secured loans.
Significant increases in operating costs across most business sectors have reduced SME profits, and the pinch on consumers' pockets has also reduced turnover for many B2C businesses. These two factors, alongside others, have made it much harder for businesses to access finance, and have also made our task of assessing the creditworthiness of a business over a five-year loan term much more challenging.
We have noticed an increase in businesses seeking to take finance secured on their properties, however our higher interest rates have historically made us uncompetitive for secured lending. So, in order to facilitate more opportunities for both lenders and borrowers, we are introducing a new 'Low LTV' category for secured business lending.
Loan to Value Ratio, or LTV, is the ratio of the amount borrowed against the value of the security offered.
Changes to the Process
We’ve refined our credit risk assessment process for secured loans to improve efficiency and to place a higher weighting on the Loan to Value Ratio where a property is being offered in support of the loan.
To be considered under this new model, a borrower will need to offer security over a property and will need to demonstrate a Loan to Value no greater than 70% on a 2nd charge or a Loan to Value no greater than 75% on a 1st charge.
We’re confident the addition of this new process for well-secured loans will allow lenders to diversify their lending portfolio by providing more secured lending opportunities at a wider variety of interest rates. This should result in an improved long-term net return, with the increased security guarding against an overall net return decline in the event of further economic uncertainty or a downturn.
As this is a slight change to our standard process, and while all lenders may not be aware of the changes, we have disabled auto-bids on these new 'Low LTV' secured loans. As such, in order to participate in these loan auctions, lenders will need to manually bid on the Primary Marketplace.
Loans that do not offer property, or which offer a property with a Loan To Value ratio above the threshold, will go through our 'normal' review process, which will remain unchanged.
Changes to the Loan Profile
To ensure lenders have sufficient information to accurately assess these secured lending opportunities, we have made some small changes to the loan profiles for secured loans which meet the LTV criteria.
You’ll be able to easily identify secured loans reviewed under the new process as they will have a green profile background. They will also have a risk warning and a loan update post identifying them as such.
For these new secured loans, lenders will be provided with:
- The Loan to Value Ratio
- The variation of the company credit score over time
- Summary commentary on the company's credit file. This information is provided by Creditsafe and is designed to highlight key factors (both positive and negative) that have influenced the company's credit score.
We will also upload the full credit report from Creditsafe for lenders to download and review in the 'Important Files' section of the overview tab.
As this change places a greater emphasis on the security rather than the financials of the borrower company, we will no longer be collecting and displaying financial information for the borrower in as much detail. Unless the borrower elects to send us additional information, only publicly available financial accounts for the borrower will be presented. These will usually be abbreviated accounts so will likely be limited to the balance sheet of recent filed accounts rather than the full accounts and P&L, and will likely not include any recent management accounts or VAT returns. The 'Key Risks' on the overview tab will also be limited, highlighting risks focused around the security rather than risks arising from a detailed review of the company's financials.
The listing presentation and information for loans that don't meet the new security and LTV criteria will remain unchanged.
Changes to the rates and fees
To ensure lenders have a large range of secured loan applications to choose from at rates they are comfortable with, we have made a change to widen the banding of risk ratings and associated maximum bid rates on secured loans that meet our new LTV thresholds.
- F rated loans - the max lender rate will be 19%
- E rated loans - the max lender rate will be 17%
- D rated loans - the max lender rate will be 15%
- C rated loans - the max lender rate will be 13%
- B rated loans - the max lender rate will be 10%
- A rated loans - the max lender rate will be 7%
- A* rated loans - the max lender rate will be 4%
Please note that these bands pertain only to new 'Low LTV' secured loans.
Summary
We're hopeful this change will result in a more active Primary Marketplace by allowing us to offer loans from a profile of borrower who we have traditionally been too expensive for. We're continuing to accept and review loan applications that don't meet the new security and LTV criteria, and these will go through our normal review process and be listed as they are currently.
If you are a lender interested in secured loan opportunities, keep an eye on the Primary Marketplace for these new 'Low LTV' secured loan applications in addition to our usual offering.
