Our Loan Loss Provision – how it’s performed so far

For any investor looking to put their money to work, security and protection are often a top priority. There are various ways peer-to-peer investment platforms can mitigate risks to investors, in particular if a borrower is in the unfortunate position of being unable to repay their loan.

At Growth Street, we provide protection for our investors in the form of our Loan Loss Provision (LLP). So far, the LLP has ensured that no investor has lost any of their initial investment or interest owed (although it’s important to remember that it is not a guarantee, and that past performance may not be a reliable indicator of future results).

But how exactly does our Loan Loss Provision work? In this blog, we take a closer look at how we’ve used the LLP since it was set up, and we’ll explain the steps we’re taking to minimise the risks to our investors in future.

First off, how does the Loan Loss Provision work?

The Loan Loss Provision helps mitigate risks to investors in two ways:

  • It allows us to automatically diversify investors’ risk across the entire borrowing portfolio.
  • It holds capital which Growth Street uses to repay investors in the event of a borrower defaulting.

As of 20th December 2018, ten loans have reached the point where we needed to utilise LLP funds to repay our investors. These are referred to as ‘claims’.

Because of this risk to our investors, some of the fees we charge all our borrowers take the form of contributions to the LLP. These fees vary from borrower to borrower, and the value of a given borrower’s contributions is determined by our credit process, which uses a variety of credit analysis tools, including Moody’s RiskCalc (a model for determining the creditworthiness of private companies based on their likelihood to default).

Our goal is to ensure that on average, across all borrowers, we collect enough contributions to cover the amount we expect to lose through claims on the LLP.

Why would a claim be made, and what are we doing to manage them?

Claims occur when the Loan Loss Provision is used to repay investors following a borrower default. Broadly, there have been three reasons for claims since we set up the LLP:

- Fraud

We perform a number of checks to reduce the risk of fraudulent borrowing on the Growth Street platform. These include KYC (know your customer) and credit checks, both on the company itself and on its key directors and shareholders. We take care to confirm that all borrowing businesses are UK-registered entities with verified bank statements. We’ll often meet business owners in person and, depending on the type of business and the amount being borrowed, we may visit company headquarters and / or trading operations.

Staying ahead of the game when it comes to detecting fraud is a central part of Growth Street’s business. This year we became a member of Cifas, a not-for-profit national fraud prevention service, to enhance our ability to identify those who are either at risk of being defrauded, or committing fraud, before they have borrowed money from Growth Street investors. We’re also active users of Open Banking, which allows us to review potential borrowers’ transaction histories to ensure they’re worthy of credit.

Checks are not just completed before a company borrows, they are also used throughout a borrower’s relationship with us. We take care to regularly repeat fraud and identity checks, and Open Banking allows us to maintain continuous connections with our borrowers’ accounts. This allows us to monitor borrowers’ cash flows in real time, spotting any irregularities or deviations from the information provided to us by customers.

Unfortunately, just like us, fraudsters are continuously evolving. Although we have significantly strengthened our anti-fraud checks, we will never stop refining and developing how we tackle fraud, and we’ll continue to factor the potential for fraud into our business operations. Fraud will happen, but we feel that we’re now in a much better position to identify problem cases as early as possible (hopefully, in most cases, before any money is borrowed), and to mitigate any potential losses.

- Changes to credit policy

Until early 2017, Growth Street offered two products under the GrowthLine banner. One, which we called ‘debtor-based borrowing’, worked much like a single-invoice finance facility, where money was lent against specific debts owed to the borrower. The underwriting criteria for this product was very different to our core revolving credit product, as it was based on the quality of the borrower’s customers, rather than the borrower itself. However, default rates with this legacy product were higher than predicted, and in the end we decided to stop offering this type of borrowing through GrowthLine, and to focus solely on our revolving product.

Today, GrowthLine facilities are underwritten on the basis of the strength of the borrower’s financial position. GrowthLine limits are based on the value of the business’s current assets (including invoices, stock and work in progress). We have a thorough credit assessment process, taking into account factors like historic and current trading performance, third-party credit reference agency reports, the business’s strategy and operations, and the calibre of the management team. All these variables are vital when working out whether a business is a good fit for GrowthLine.

Despite these changes to policy and the products we offer borrowers, claims pertaining to our older credit policy are still reflected in Loan Loss Provision statistics.

- Business performance

No matter how thoroughly a borrower is assessed, unfortunately some businesses can face downturns and even failure. There are many different circumstances which could result in a business’s performance declining. For example, there could be changes to the sector in which they operate; new competition could push them out; a major contributor to the business could become ill or unable to work, or customers could fail to pay for services or products supplied. (This list is by no means exhaustive).

Through our extensive monitoring, we do everything we can to identify these types of issues early, but sometimes defaults can happen more quickly than we can react.

Previous claims against the provision

Below, we’ve provided a breakdown of payments made from the Loan Loss Provision, as well as the reasons behind each claim:

Growth Street Loan Loss Provision chart

You can see above that in 2017, 94% of the value of claims made came down to business lending that no longer fits within our credit policy. There is no longer any exposure in our portfolio to this kind of default, as the related legacy product has been discontinued. This means we won’t experience this type of loss in the future.

In 2018, 40% of claims made were as a result of two loans that were flagged as cases of fraud. Both of these claims related to borrowers onboarded before we enhanced our fraud checks by becoming a member of Cifas and starting to use Open Banking.Since the introduction of our new measures, there have been multiple occasions where these new checks have prevented potentially fraudulent borrowing occurring through Growth Street.

This year we have also made significant improvements to our financial data management tools, which enable us to monitor the performance of borrowers more closely. In 2019 we will be building more advanced analytics on top of this data to give our relationship managers more insight into our borrowers. This should help them act more proactively to support good borrowers, and to work more closely with borrowers that are underperforming. We think that all these measures will help us deal with potential defaults before they happen.

In the future, we anticipate the LLP to be needed only in the unfortunate event of a business not having the cashflow to make their repayments, which is a normal part of the lending experience.

The effects of this are already being seen. In the chart below, you can see the number of LLP claims based on when the defaulting borrower began working with Growth Street. You can see that borrowers originated in 2018 are performing significantly better than earlier borrowers, despite our total lending growing significantly in 2018. We believe this is a direct result of the work we’ve done to phase out our older credit policy, and to introduce enhanced fraud checks and credit assessments.

Growth Street LLP claims by reason and year

Some of the most significant changes made this year have been within our credit and risk teams. I joined Growth Street towards the end of 2017, having spent more than 30 years working within big banks and digital challengers. Since then, I have been building an experienced and diverse team to support me as our loan book grows, with the credit team more than doubling in size over the past twelve months.

The whole team works hard to keep claims on the Loan Loss Provision to a minimum. But, in the unfortunate situation that a claim is made and the debt is transferred to the LLP, it’s worth noting that all money recovered on the debt after that point goes directly back into the LLP. While the figures on our statistics page only show the actual money recovered on defaulted loans, we are actively working with many of the borrowers who have defaulted to continue recovering more funds, and so expect to see further recoveries against a number of claims.

Finally, it's always worth remembering that the Loan Loss Provision we offer does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The fund has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Loan Loss Provision when considering whether or how much to invest.

A final word

Our role as a peer-to-peer platform is not only to help businesses grow, but to minimise risk to our investors where possible. This means we take due diligence on prospective and live borrowers very seriously.

We think that blending cutting-edge technology with old-school relationship management is the best way to operate from a risk perspective. Through Open Banking and cloud accounting integrations, we can look at the most recent data to closely monitor our borrowers and protect our investors’ money. We also have a dedicated team of relationship managers who work to really understand our borrowers and help them deliver sustainable growth.

We believe our credit underwriting process allows us to identify strong, growing UK businesses who will benefit from having access to funds. But we also know that there are always improvements that can be made. That’s why we are continuously updating our credit processes and criteria - we want to make better and more reliable decisions that ultimately help protect our investors.

Being a responsible lender means being transparent about how and why defaults happen. Investors and borrowers alike should be told when things don’t go perfectly. We will continue to put risk at the forefront of everything we do, so that investors can be confident that their investment has the right protection and security.


(Your capital is at risk when you lend to businesses. Lending through Growth Street Exchange Ltd is not covered by the Financial Services Compensation Scheme.)

Written on in Investing
Risk Director