We have improved the way we provide updates on the status of a loan to investors by automating the process to make sure it is simpler and more efficient - meaning no more ad hoc updates.
We will update investors via a loan comment when there is a significant change to its status; for example when it becomes late, enters a payment plan or is defaulted. We will update comments each month, and only loans that have changed their status in the previous month will receive an update. Any loans that have not changed status, will not receive a update as the circumstance remains the same.
This new process will allow the team to continue to focus on supporting impacted businesses and avoid unnecessary credit losses, protecting your returns in the process. At the same time, these comments will still provide you with key updates on the business you lend to.
We have provided more information on each of the relevant stages below:
Downgraded
If we receive a report that may affect the business or loan guarantor’s ability to repay the loan, we will downgrade a loan by removing the risk band. This could be an adverse credit event such as a County Court Judgment (CCJ), or a winding up petition against the business.
A downgraded loan will not necessarily always become late or defaulted. However, removing the risk band prevents it being sold to other investors while our team investigates the report (although it is worth noting that due to the ongoing environment, the secondary market is currently paused in order to ensure that loans bought and sold by investors on the secondary market are priced fairly). We may reinstate the risk band—allowing the loan to be traded (in the future)—if we deem the event will have no impact on business’s ability to repay its loan, and there is no additional risk to investors. If this is the case, the risk band will usually be reinstated within 28 days.
Late
If a business misses a loan repayment, or only makes a partial payment, the loan will fall late. If the loan falls late, we will contact the business to understand its position and help them with clearing the arrears. If a payment cannot be met immediately, we will continue to work with and assist the business with getting back on track as soon as possible. Where possible, we aim to support businesses through financial difficulties whilst they get back on their feet and look to recommence payments.
However, if it becomes evident that the contractual payments cannot be maintained; the business accrues four missed payments; or enters a formal insolvency process; then we will proceed to default the loan. This protects investors’ interests by activating the personal guarantee and allows us to demand full repayment from both the business and loan guarantor.
Payment plan (pre-default)
If we think it will provide the best outcome for both investors and the business, we may agree to a payment plan. This provides the business with a payment break or reduced payments for a period of time.
Providing businesses with the support and breathing space needed to get through a challenging trading period is often the best way to help them get back on their feet, generate revenue and subsequently repay their loans. This avoids unnecessary credit losses, maintaining your repayments over the long term.
If appropriate, we will continue to provide further flexibility for businesses that need it, ensuring we are doing everything we can to both support them and protect your portfolio in the long-term.
Defaulted loans
If a loan is defaulted, it means that the borrower has breached the terms of the loan contract, and we have determined that the best course of action is to formally demand repayment of the outstanding loan balance from the business and loan guarantor. This enables us to take the actions required—including through the guarantor’s Personal Guarantee—to recover the loan on behalf of investors.
Usually, a loan is defaulted due to missed payments, a formal insolvency process or concerns regarding a borrower’s conduct or failure to cooperate.
Following default, our Recoveries team will complete a full assessment of the business and loan guarantor’s asset position and financial circumstances. Where immediate repayment of the loan is not possible, we will work with the loan guarantor(s) to agree a fair, affordable and sustainable monthly payment plan.
Payment plan (post-default)
Supporting borrowers/guarantors, where they are co-operative and transparent, is the best way to maximise recoveries for investors. In these instances we may enter into a formal repayment plan.
Upon agreement of a formal repayment plan, we will monitor the agreed monthly payments and ensure that any failed or missed payments are pursued with the borrower/loan guarantor. If the payment plan is breached and the borrower/guarantor does not bring their payments up to date, or agree to a suitable alternative plan, we may commence legal proceedings.
We review payment plans (and the guarantor’s financial position) periodically throughout each year, to ensure that the level of payment plan is fair to both the borrower and to investors. Although repayments may be small to start with, given time, payment plans do increase and form a significant part of the recoveries for investors. In some instances, we may require security over the guarantor’s property.
Litigation
We may commence legal proceedings against a borrower or loan guarantor(s) where they have not cooperated with us. For example, they may not have agreed to a fair repayment arrangement, or refused to provide a charge over property when requested.
Sometimes court action will result in us appointing High Court Enforcement Officers (i.e. bailiffs) to agree a payment plan with a guarantor, or we may seek to obtain a charge on their property and then an Order for Sale. This is very much the last resort for us.
We will normally stop any legal action if the guarantor starts communicating with us again. That said, if we have any reason to believe that a guarantor is deliberately trying to deceive us (rather than simply being afraid to face up to his or her responsibilities), we will always take legal action or commence bankruptcy proceedings rather than try to negotiate or approve an IVA (see below for more info on an IVA)
Personal Insolvency (Bankruptcy, IVA)
Sometimes personal insolvency—for example through an Individual Voluntary Arrangement (IVA) or bankruptcy—is the right option for an individual. When this happens, we will lodge a claim with the appointed insolvency practitioner to seek to ensure investors are eligible for a dividend. At this early stage in the process, it is not yet known whether there will be any return to creditors from the insolvency, however it is very unlikely that the loan will be recovered in full.
Typically, a bankruptcy appointment will last for at least 12 months, but usually 2 years, and an IVA will last for up to 6 years.
As the appointment progresses, our insolvency team will continue to liaise with the insolvency practitioner. We will provide further updates on an annual basis or as often as significant developments occur.
Settlement
If you have received notification that a loan has been settled, we have agreed and received the final repayment from the loan guarantor and distributed this payment to investors before closing the loan account. No further updates will be provided to investors following settlement.
Please note that we may—at our discretion and where it is deemed in the best interests of investors—agree to a relatively small reduction in the settlement amount if this facilitates a quick return to investors; as opposed to a long-term reduced payment plan. This will usually mean waiving a proportion of the interest that is owed to investors. If it is determined that it is in investors’ interests to accept a settlement that involves the write off of the original loan principal, we will provide a further loan comment to confirm this.
Broken Payment Plan
On occasions, a borrower/guarantor(s) may miss the monthly payment due as part of their agreed repayment plan. This may happen for a number of reasons, such as a difficult trading period, an unexpected emergency expense which temporarily affects cash flow or an administrative error. We encourage borrowers/guarantors to provide early notice to us if they are experiencing issues with meeting their repayments so we can discuss alternative payment options with them and/or take appropriate actions to protect investors’ interests.
If we are not informed by the borrower/guarantor that their forthcoming payment will not be met and no alternative arrangements have been agreed, we will take immediate steps to contact them to arrange payment of the amount which is overdue. If we are unable to secure contact within a reasonable timeframe, the payment remains outstanding or further payments are missed, we may default the loan (if not already defaulted) or commence litigation (if already defaulted) to enforce recovery.
Closed
We will proceed to close an account once full repayment has been received, a settlement agreement has been reached or where it is determined that there is no further prospect of recovery to investors (see example scenarios below). In advance of closure, we will take all available steps to recover the loan balance as set out in the steps outlined above.
In certain circumstances, such as a guarantor’s personal insolvency, we are unlikely to receive full repayment of the loan balance and an involuntary write off will be required. Occasionally, it may not be deemed commercial to pursue a recovery if the anticipated costs will outweigh the benefit to investors and contravene their overall interests.
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