Funding Circle shuffles the pack

Funding Circle (FCH) interims left investors asking the usual questions about whether the company is simply a clearing house for City loans to small and medium-sized businesses, or a robo-lending vehicle for taking on credit risk – around 60 per cent of its loan decisions are instant. Whatever the future holds, the present looks likely to resemble the past as chief executive Samir Desai steps down at the year-end to take up a back-seat role in favour of long-time UK MD Lisa Jacobs. Getting to grips with a lending environment that looks increasingly cautious after an SME boom led by government-backed business Corona Business Interruption Loans (CBILS) is the first order of business when the new incumbent eventually takes the reins.

While it is thought that Funding Circle was the single-biggest distributor of CBILS, along with the equivalent in the US, the scheme’s natural tapering off poses a significant strategic challenge. The demand for the follow-up Covid Recovery Loans has been “relatively low”, according to management, and borrowers seem to be exercising caution as the economy exits the pandemic phase. In other words, Funding Circle is going to have to work harder for growth as the year progresses.

One way the company seems to be addressing this is to involve itself more comprehensively in the 'pay-later' market for SMEs – which is basically a form of supply chain finance. The company plans to launch a 'Flexipay”' product in the third quarter that offers borrowers the option to settle invoices for a one-off 3 per cent fee and then to spread the repayment over three months, interest-free. The other option for the company is to keep going with its house-keeping measures. For instance, operating costs, which strip out the impact of one-off impairment charges, fell by £12.4m in these results and management does not think that discretionary costs are likely to creep up this year.

Fundamentally, Funding Circle needs loan volume to generate the fees that make up 60 per cent of its income. That is partly why the company is so keen to bring the total number of automated loan decisions up to 80 per cent of all loans, although it remains to be seen what impact this will have on overall credit quality. Based on forecasts from broker Numis, FCH trades on a forward PE for 2022 of 17. For a company still struggling to articulate its business model a decade after its foundation, that looks priced to market. Hold.

Last IC view: Hold, 148p, 25 Mar 2021