At Growth Street we believe the most important thing we can do for our lenders is to take an active role in managing risk. To accomplish this, we have put in place a series of systems and controls, which we collectively call the Default Shield.
The Default Shield has been designed to provide Growth Street lenders with what we believe is a great return, given the protection in place. It also means that to invest, you don't have to be an expert in business credit or come up with a diversification strategy for your Growth Street investments. Just decide the return you are looking to achieve and put your investment to work.
Loan Loss Provision
In 2014 we established the Loan Loss Provision, to help manage risk and aim to offer greater predictability to investors. The Loan Loss Provision is designed to repay lenders in the event of a borrower default.
All borrowers pay a risk-weighted contribution into the Loan Loss Provision. These contributions are calculated by our credit team to be more than enough to cover expected losses. Read more about this below. Additionally, our founding equity investors have provided extra capital to act as a buffer for any unexpected losses. Growth Street target maintaining the Loan Loss Provision at a level equivalent to at least 9% of the total loan book.
We're proud that since Growth Street was launched in 2014, as of 3 February 2017 the Loan Loss Provision has ensured no investor has ever lost a penny. Despite this impressive track record, we like to be clear that the Loan Loss Provision does not provide a guarantee and investments are not covered by the Financial Services Compensation Scheme.
As of 3 February 2017
Loan Loss Provision Coverage
Loan Loss Provision Coverage Ratio:
The Coverage Ratio is how we estimate the Loan Loss Provision's ability to return all principal to investors, plus interest earned. It is calculated by dividing the size of the Loan Loss Provision by Expected Losses.
A 100% Coverage Ratio indicates the Loan Loss Provision should be able to cover all expected losses. Our Coverage Ratio is 305%, which means we are holding a significant amount of extra capital to act as a buffer against any expected losses in the portfolio.
We calculate the expected loss rate for each borrower using the most recent financial information gathered from thorough advanced data integrations with accounting platforms. This information is reviewed by our experienced underwriters and then run through both Moody's RiskCalc™ and our internal credit scorecard. This process is repeated on at least a monthly basis to ensure we provision the correct amount for each borrower.Start investing
Size of Loan Loss Provision
Size of Loan Loss Provision:
|Historic borrower contributions:||£94,358|
|Future borrower contributions:||£172,529|
|Held against Expected Losses of:||£153,066|
All borrowers pay a risk-weighted contribution into the Loan Loss Provision. These contributions are paid by borrowers monthly. To date, we have collected £94,358 from these monthly payments, and expect to receive another £172,529 in the next 12 months*.
On top of our borrowers' contributions, our founding investors have contributed £200,000 to the Loan Loss Provision, with the aim of maintaining the provisions at more than 9% of the total loan book. They have committed future payments into the Loan Loss Provision of up to £1 million to maintain this percentage level as the book grows.
*Expected contributions will vary based on the size and borrowing activity of the Growth Street portfolio. This figure has been calculated by assuming each borrower in the portfolio maintains for the next 12 months their outstanding balance as of 3 February 2017.
Default risk is diversified across the whole portfolio of borrowers
With Growth Street, your investment may be matched with just one borrower, or it may be spread across many borrowers. It's important to understand that, regardless of how many borrowers you are matched with, your risk of loss on a default is spread across the whole portfolio of borrowers. It is the same whether you are investing £10 or £1,000,000.
This diversification of default risk is made possible by the Loan Loss Provision, which every borrower contributes to. Provided the Loan Loss Provision has adequate funds, if any borrower that you are matched with defaults on its loan then your interest and principal on that loan will be made good by the Loan Loss Provision, without you having to do anything or wait for a recovery.
If at any stage the value of the Loan Loss Provision falls below the level of expected losses, all loans will be transferred to the Loan Loss Provision. Repayments will then be made to all investors on a pro rata basis, ensuring that no lender is exposed to the default risk of a particular borrower. In this scenario, investors may not have all of their interest and capital returned if borrowers do not repay. However each lender will have an interest in all loans, and so a lender's investment will be diversified across the whole portfolio of borrowers.
How does the Loan Loss Provision work?
The good news is it's really very simple. Money in the Loan Loss Provision is held in a separate company called Growth Street Provision Limited. The company is contractually obliged to reimburse investors when borrowers miss a payment providing there is sufficient money in the Loan Loss Provision.
All borrowers pay a risk-adjusted contribution into the Loan Loss Provision
Extra capital is paid into the Loan Loss Provision by founding investors to act as a buffer against unexpected losses
Investors are reimbursed by the Loan Loss Provision if a borrower misses a payment, provided there are sufficient funds available in the Loan Loss Provision.
What happens if the Loan Loss Provision is depleted?
In the event of the Loan Loss Provision being depleted below the level of expected losses, Growth Street would declare a “Resolution Event”. This would mean all outstanding loan contracts would be automatically assigned to the Loan Loss Provision, and all loan repayments would be collected by the Loan Loss Provision on behalf of investors.
Repayments would then be shared out pro rata to investors to ensure diversification of default risk. There would be a material delay in repayments being made.
What happens if Growth Street ceases to operate?
In the event that Growth Street stopped trading, we have a fully-funded run-off plan that would kick in, as required by regulation.
Contracts between borrowers and lenders remain binding, and the Loan Loss Provision would continue to operate.
Investors' money would always remain entirely separate to Growth Street's money throughout the run-off process.
For more details on the Loan Loss Provision, please see Lender Terms & Conditions.
Advanced Data Integration
Each Growth Street borrower is required to provide regular, direct access to in-depth business and financial data at the time of application, as well as ongoing throughout the term of borrowing. This data includes things like management reports, bank activity, and in many cases direct access to cloud accounting data. Growth Street borrowing facilities are uncommitted, so drawdown requests are only processed if, using the latest data available, the key covenant tests are being met.
During underwriting, Growth Street doesn't just run the numbers through a standard system that gives a yes or no answer. We aim to actively work with the customer to understand the specifics of their business, and tailor our analysis to be appropriate. We then aim to use this system on an ongoing basis, allowing us to spot upcoming challenges well before they become problems, and work with the customer to find a good resolution for everyone.
Every Growth Street loan is secured. We typically take first- or second-ranking fixed and floating charges over all business assets. Alternatively, we take fixed charges over book debts relating to specific invoices. Depending on the creditworthiness of the borrower, we sometimes also take personal guarantees from one or more directors. To maintain anonymity on both sides of the platform, lenders are not able to see information about who they are lending to.