Understanding the Lender Marketplace - Part 3: Managing risk

This three-part series provides a behind-the-scenes look at how marketplace lending works at Growth Street.

The Growth Street Lender Marketpkace

Investing offers the potential of earning a profit in return for taking on a risk that some or all of your investment may be lost. Balancing the level of risk taken against returns on offer is a decision anyone making investments should consider carefully.

Growth Street offers the opportunity to lend money to UK businesses for up to 30 days at a time, and in return earn interest. With a team experienced in many different types of business investments, we know much about the risks involved in this type of investment, and work hard to protect our investors from potential downsides. We believe the best way to do this is to take a multi-tiered approach, and to align our interests with those of the investors on our platform.

Credit assessment of borrowers

It starts with the way we bring borrowers onto the platform. Every potential borrower with Growth Street is required to undergo a thorough credit review process designed by our Risk team. This includes a review of public and private company data, comprising of at least: filed company accounts and management account data for the preceding 15 months. Companies which use modern cloud-based accounting platforms to manage their business, such as Xero and Quickbooks Online, are able to provide this data instantly through direct integrations with the Growth Street platform. We don’t typically conduct personal credit checks on company directors, but occasionally do so under certain circumstances.

Once we have all of the information we need, we will conduct a short interview with a company director, to get a better overview of the history of the business, understand the story behind the numbers, and the purposes for borrowing. This information is combined with the company's financial data and results from our credit bureau partners, Experian and Moody’s, and then processed through our proprietary credit scoring process.

The aim is to provide an appropriate risk-based borrowing limit and to set an individual Risk Rate for company borrowing. The Risk Rate is collected as part of interest charges, and is paid into the Loan Loss Provision, which we’ll cover below.

Ongoing monitoring

After a borrower has been provided with access to our platform and can request loans, our oversight of the business does not end there. We agree certain financial metrics with borrowers, which we monitor on a regular basis. Those customers with modern, cloud-based accounting platforms again provide direct access through integrations with our platform, and customers who use older, desktop-based software are required to install a small application which allows us to access the data directly.

By conducting regular monitoring in this way, we can step in and work with borrowers to adjust the borrowing limit to the needs of their business. If the business is performing strongly, we can revise the Risk Rate and/or provide access to further capital. If the business starts to underperform against the agreed financial metrics, we will work actively with these customers to improve their financial position, or reduce borrowing as appropriate. This process is a two-way conversation, with the goal of achieving a positive conclusion for both the borrower and the investors.

Loan loss provision

While the credit review and ongoing monitoring are designed to significantly reduce risk, there will be occasions where a borrower is unable to repay a loan. For these cases, which we work hard to ensure will be infrequent, we maintain a separate loan loss provision. If a borrower cannot repay a loan, investors will be repaid directly by this provision, as long as there is enough money to cover the default.

The provision is made up as portions of the interest charge every borrower pays on their loans. The amount paid is determined by the aforementioned Risk Rate, and this rate can be increased or decreased as appropriate by our credit team on a regular basis. Through this provision, every investor has their risk of loss automatically diversified across the entire portfolio of borrowers, rather than being exposed entirely to the specific risk associated with the company they lend to.

In addition to the amount paid by borrowers, we have invested a portion of our own capital into the provision, to ensure the amount available is appropriate for the risk across the portfolio of borrowers and loans. This also means our interests are aligned with our investors, as it’s our money that is lost first when a borrower defaults.

You can read more about the loan loss provision here, and see how much is currently held. This page is updated regularly with information about how the provision is performing.

By conducting a thorough credit review process, continually monitoring borrower business performance, and provisioning for losses, we have been able to ensure no investor has lost a single penny by investing via Growth Street (as of the time this article was published). While the past is not a promise of future performance, keeping this statistic true is core to everything we do.

Also, you should be aware 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.

We think the best way for good, growing businesses to access credit is through sustainable, responsible borrowing. We also think investing directly in these businesses is a great opportunity for investors who want to earn a return but do not want to have to review credit information for each and every business they lend to. By aligning our interests with both borrowers and investors, we aim to provide a better business banking experience.

This is the third and final instalment in our series covering the Growth Street Marketplace. The first instalment covered the Exchange and how loans are matched. The second reviewed how loans are operated once a match is made, including interest and repayments. If you have any questions, please don’t hesitate to reach out to product@growthstreet.co.uk.

Your capital is at risk if you lend to businesses. Lending is not covered by the Financial Services Compensation Scheme. Please read the full risk warning here.

Written on in Product
Head of Product