Sunday, August 14, 2016

Building Your P2P Consumer Loan Portfolio

The Sym Philosphy on Consumer Loan Selection
by Michael Sonenshine

Welcome to my P2P lending blog!  When my colleagues asked me to begin writing a P2P blog my first instinct was to refuse.  Volumes have already been written on the subject and an ever growing number of people are devoting their careers to following the P2P lending industry.  I am reminded of the California gold rush and I find no small irony in the fact that the two largest P2P lenders in the world today - Prosper and Lending Club, were founded in California.

But having managed a P2P Fund over the past two year and having reviewied dozends of platforms for potential investment I think now there is far more to say than has been said. P2P platforms come in all shapes and sizes.

One way to classify P2P platforms is by whether the platforms focus on consumer loans or business loans. Consumers as a group behave differently than businesses as a group. Here are some of the rules when I look at consumer-based P2P platforms :

1. The risk/reward curve flattens, perhaps even turns downward.  What does this mean in practice? It means there's no real good reason to select pools of higher risk class D and E loans.  You get no real pickup in yield but the likelihood of default dramatically increases.

2. High quality ranking (i.e. A), does not necessarily mean most likely to repay.  In practice, the default rates I've observed with my "A" quality loans has been actually higher than in my "B" quality loans.

3. Watch the DTI - Debt to income ratio is an important item.  It measures the amount of the consumer's monthly debt payment to the consumer's monthly income. The higher the DTI, the lower the consumer's disposable income, and the greater is the liklihood that the conusmer will have difficulty with loan installments.

4. Short term doesn't necessarily mean lower risk - On the one hand, it's true that more things can go wrong in the long run than in the short run.  On the other hand, all else equal, the consumer borrower with a five year term will have a lower DTI than a consumer borrowing with a three year DTI.

5. Jobs matter - Certain types of jobs are inherently more stable and more secure than other types of jobs. For example, civil servants, university professors, police officers, fire fighters, accountants, doctors, lawyers and medical technicians have either highly specific skill sets or benefit from built-in job security.

6. Don't judge a book by its cover.  For example, many "A" loans are actually "B" loans, but due to the platform credit scoring system are graded "A."  At the same time, many "D", "E" or "F" actually have better credit fundamentals than the grade indicates.  They are bargains.  They offer a relatively high rate of interest, coupled with a relatively low probability of default.

7. Platform lending criteria are extremely important. The story of Prosper and Lending Club reminds me of the Charles Dickens' Tale of Two Cities.  Both platforms started at about the same time.  However, in the early years Prosper had a consistently poor lending model.  Investors experienced poor returns and returns that were not consistent with the rated credit quality.  Lending Club in contrast, delivered solid returns.  In recent years Prosper has signficantly improved its credit process.  How you do you judge a platform's lending criteria?  Firstly, you have to look at the returns over time.  This is why I almost never invest in platforms with a short operating history.  Secondly you have to ask questions of platform management and read the platform materials carefully.  Quality platforms will disclose their credit statistics transparently and will document their credit procedures.

8. Pay attention to credit history. Platforms should report credit bureau information on the conusmer borrowers.  You can see history of missed payments (delinquencies) and in the US, "public filings," meaning that the consumer had filed for bankruptcy and debt relief.  One school of thought is that the conusmer has learned a hard lesson and going forward will manage credit much better.  This is in part why E and F loans can perform better.  Many of the conusmers in this category understand well the need to improve their credit scores.  On the other hand, many of these consumers have unstable credit profiles.  I tend to avoid the lower ranking loans and I almost never buy loans when I see more than 1 or 2 delinquencies in the last 10 years.

9. It's a numbers game. The conusmer loan business is driven mainly by statistics.  Lenders have a limited set of information and they use highly automated processes.  Credit decisions are made by computers based on statistical banking models.  Every lender expects there will be a certain number of bad loans in each portfolio.  The key to success is that the lender is receiving a rate of interest that compensatest for the defaults.  So for example, each borrower pays 10%.  Each year 2 of each 100 loans goes bad (i.e. a 2% default rate).  Using simple math, the lender generates 8% per annum return. The important thing is that the lender should have a widely diversified portfolio so the lender's return is driven not by the performance of individual consumers, but by the statistics of the overall pool.  The more loans that are in the pool, the better. For this reason many platforms enable investors to take advantage of automated filtering tools that basically enable investors to simply "buy the index."

Peer to peer loans available on quality platforms such as Lending Club and Prosper enable many investors to gain access to an asset class that over many years has served banks well. The key risk for investors is that the P2P platform changes its credit processes over time and fails to deliver returns consistent with the estimated risk level.  Pay close attention to platform performance, diversify your portfolio.  Spread your investments among several platforms.  Or better still - find a good P2P fund.  More and more of them are coming to market all the time.

Note:  Your money is at risk whenever you invest in P2P loans, so invest carefully ask questions and invest only what you can afford to lose.  Returns from P2P loan pools may vary widely over time, depending on macro economic conditions. 

Feel free to e-mail if you have questions or concerns. Visit our Symvest and SymCredit sites!

P2P Selection - How We Choose our Borrowers

"Any one can make loans!  Takes no talent, takes no guts.  Making good that's a whole 'nother story..."  Michael Sonenshine, CEO SymCredit

It's been nearly two years since I laid out the business plan for the SymCredit platform, raised some equity financing and set to work.  The first year was all about building a foundation - designing the website, hiring some managers, firing some managers, writing policies and procedures and re-writing policies and procedures.

Nearly nine months ago we on-boarded our first borrower and now we are on-boarding new loans monthly.  We are still growing at a snail's pace, much to the dismay of our investors, who would like to see us moving at lightning speed.

There are a number of reasons for the slow start out of the box, which I won't detail here.  I had the experience many years ago of pushing a services organisation onto the fast track opening the door to far too many error and far too many corrections and spending time and money cleaning up the mess and worse, having to re-earn the trust and confidence of customers.

I'm often asked the question about how I benchmark SymCredit, not only in terms of its development, but in terms of installing good practice.  In terms of development, I look at the biggest platforms in the sector today, where they were five years ago and what was their trajectory since.

A few names that stand out in my mind are Funding Circle (UK), LinkedFinance (Ireland), Bondora (Estonia) and Zltymelon (Slovakia).  At the end of 2010 Funding Circle based in the UK had placed GBP 2.2 mln worth of loans.  Six years on they have surpassed GBP 1.2 billion.  Linked Finance opened its doors in 2013.  During the first six months they loaned about EUR 1 mln and today, about 3 years later they have grown to EUR 18 mn. Bondora launched in 2009.  Volumes were small in the early years.  By 2014 nearly five years after establishing operations they had grown to EUR 22 mn and now they are close to EUR 60 mn.    Zltymelon, based in Slovakia launched operations in 2013.  It took them nearly a year and a half to surpass EUR 1 mn in loan volume.  Three years down the road they have lend more than EUR 4mn.

Looked at in this context, we are about where we should be.  We've got our first borrowers.  We've got our first investors.  Momentum is picking up.  From here on it's all about execution and smart marketing. Like every new P2P Platform we expect to grow slowly in the initial years and then accelerate rapidly. Why?  Because it takes time to educate the market and earn the trust of investors.

In terms of installing good practice, I look most closely at Funding Circle.  This is not to say others are not good.  Rather this is say I truly respect and admire the way Funding Circle runs its business and this is why I invest part of the Symfonie Lending Fund via the Funding Circle Platform.  If you ever have the chance to meet Funding Circle founder Samir Desai you will find the conversation a learning experience.

When I invest via a peer to peer lending platform I am putting my faith mainly in the ability of the platform to evaluate borrowers.  I expect that the overall pool of borrowers will deliver a total return consistent with the risk level they represent.  At funding circle the overall pool of loans delivers about a 7% annual return.  The most stable and consistent returns come from the highest rated A borrowers.  The riskier rated C and now D borrowers have gross yields of between 11% and 18% but after defaults are factored in the returns are within the expectation.

Platform statistics tell the story of how a peer to peer lender selects borrowers classifieds them and manages them after the deal is done. Funding Circle stands out for the depth and transparency of its statistical presentation and the consistency of its returns.

What Funding Circle also does well is recover bad debt.  To date I've received back nearly 25% of defaulted debt. That's far more than I have received from any other platform I have invested through.  Moreover, when loans go bad, Funding Circle is clear and transparent about what went wrong with the loan and what Funding Circle is doing to recover the loan.  What's also nice is that Funding Circle doesn't charge high fees for recovering the loans.  The platform has a mechanically clear and economically efficient set of processes.  It implements the recovery process and reports the results back to investors. 

Too often in the investment banking industry bad or distressed debt is looked on as trash that when hauled away nets the trash hauler a hefty return on capital.  This is not to say that distressed debt traders don't take risk and shouldn't be compensated for it. But the business model of buying a loan at 10 cents on the dollar and collecting 20 cents on the dollar by doing nothing more than giving the borrower an easy way out is a deadweight loss for the investors who took significant risk to begin with.  Many peer to peer platforms create this cheap ride simply because trash smells and they somehow feel they don't get compensated for having to deal with rot and filth.

Funding Circle takes recovery and its responsibility to its investors seriously.  True, they are in business to broker loans.  But once the loan is brokered, the interests of their investors are their highest priority.

This leads me away from this unpaid, uncompensated plug for Funding Circle and back to the subject of this article - How We Choose our Borrowers.

In a nutshell, the answer is carefully.  Here are the some of the key principles of our credit policy:
1. Less is More. We'd rather have fewer borrowers on our platform that we can be confident in than have many borrowers that don't perform as they should.

2. Credit is about willingness to pay as much if not more than it is about ability to pay. We review the personal credit histories of the owners and directors of the borrowers on our platform.

3. Credit is about assessing the strength of the entrepreneur and management team running the company.  We assess the quality, knowledge and experience of the management at each borrower who seeks a loan from our platform.

4. We put little faith in the business plans of the future and a lot of faith in the ability of management.  Banks ask borrowers for detailed forward going business plans and projections.  What often comes out of of the process is spreadsheets with geometric extrapolations of the present based on assumptions that don't necessarily reflect anything more than the desire of the business owner to get a loan.  This is not to say banks are stupid or filled with paper pushers.  Rather, this is to say that we find that asking a business owner important and serious questions about they way he or she runs the business and where he or she wants to take the business is a better approach to the problem.

5. Our business is business loans.  At the end of the day, people run those businesses and people invest in those loans.  We select entrepreneurs who we feel demonstrate a certain personal honesty and integrity.  They understand well that people are putting their hard earned money to work with them and they understand the seriousness of the trust relationship that creates.

6. Cash flow and borrowing go hand in hand.  We'd much rather lend money to a business with a steady client base and predictable earnings that has no equity than to a cash poor business with equity on the balance sheet.  Our experience tells us that equity and assets have strange way of disappearing at the worst imaginable moment.

7. The bottom line is not as important as how the numbers add up.  Many small and medium sized business provide a stream of cash to the owners that works its way out through wages, directors fees and services fees.  This is why the balance sheet of successful wholesale or retail business can look lousy while the owner has over the years come to own 3 houses and put 4 kids through expensive universities.  When times are good the business PnL may worsen.  When times are bad there is more cash in the business, and a leaner expense base.  Moreover, from year to year tax management and tax optimisation strategies may influence the expense base.

 At the end of the day, credit is as much an art as a science. 
 Questions? Comments? Write me at

Borrower Selection - Why We Listed Tamsin

At SymCredit Peer to Peer Lending is lending the old-fashioned way.  Our P2P lending platform is like a small town community bank. We list loans on the platform for two reasons. We believe in the businesses and we believe in the people behind the businesses.
Our P2P platform is running and has real borrowers and real stories to tell.  I hope the stories I tell here can encourage good lending practices at other platforms and give P2P investors more insight on how to select investments.   I welcome comments and suggestions, so please write to me at

Case Study - Tamsin

Last year Marcus O'Neil, co-owner of Tamsin, approached me and presented Tamsin to me as a potential investment for the Symfonie Angel Fund. He told me the story of how he and how wife Lenka O'Neil developed an internet clothing business that had a growing base of customers.  He wanted to find extra capital to continue growing the business.

As I listened to Marcus I became convinced that his business would be an ideal candidate for a peer to peer loan.  Marcus left my office that day with more questions than answers.  He's a careful fellow and doesn't jump to conclusions.  This is something I especially appreciate as a creditor.  I want to invest in businesses that are run by practical people who put serious thought into their businesses.

Over the next few months I got to know Marcus and Tamsin better.  We collected the usual financial data - balance sheet and income statements.  We looked at the Tamsin website.  We looked at the order flow and the the customer traffic.  We collected personal credit histories of Marcus and Lenka.  Here's what we learned:

1. Tamsin is the brain-child of soft spoken Lenka.  She studied fashion in London. She worked for several years at Burberry's as a merchandiser.  There she learned how to understand the needs of Burberry's customers, identify products the company could sell and negotiate purchase terms that left a margin in Burberry's pocket.

2. Tamsin is a family business.  The family lives the business and the business feeds the family.  This is a double-edged sword, but fundamentally it means the owners and the management care about the business and want to make it succeed.

3. Tamsin has found a profitable and growing niche in the on-line clothing market.  An increasingly prosperous community of women visit London, find clothing they like at good prices on the high street.  Upon return to the Czech Republic and Slovakia they find it difficult to buy such clothing in the local market. Few of the British retailers service the on-line market and provide good delivery and return policies.  Getting the goods here takes a long time.  Returning merchandise that doesn't fit will or is defective takes a long time.  There isn't much flexibility around delivery either. Many consumers prefer to pickup the goods at a local fulfillment center that offers more flexibility than having to sit at home and wait for delivery.

4. Tamsin has a flexible and dynamic business model.  Lenka scours the UK market for clothing that would appeal to her customers.  When she finds interesting items she posts them on the website.  After her customers order the merchandise Tamsin buys the items.  Marcus manages the logistics of getting the clothing from the UK delivered to the Czech Republic where a local logistics partner handles final delivery.

5. Marcus and Lenka invested heavily in technology.  They hired a smart IT specialist, Michal Dolezal, who codes the website and develops the commercial tools. Michal has 18 years of experience and owns some equity in the business. This is no easy feat.  Tamsin have more than 6,000 SKUs on their website and this list is continually changing.

6. Tamsin found its market.  Over the last year the number of unique visitors to its website has doubled, from 33,000 monthly, to more than 60,000 monthly.  Orders have increased from 150 monthly to 630 monthly.  The increased conversion rate is means Tamsin is turning more of its visitors into paying customers.  Sales have tripled, from 360,000 CZK (about 13,000 EUR) per month to more than 1,000,000 CZK  (about 40,000 EUR) per month.

7. The business has plenty of growth opportunity.  Research suggests that in the Czech Republic 81% of internet users have used on-line shopping, compared to just 59% elsewhere in Central Europe. Electronics is the most popular, followed by clothing and cosmetics. Many users wish to avoid giving their credit card details on-line.  Tamsin and many other on-line retailers in Central Europe offer merchandise Cash on Delivery.  Many international retailers don't offer cash on delivery service, yet cash on delivery can represent upto 40% of sales, according to industry research.

8. Tamsin can expand across product lines as well as across markets. They recently added men's clothing to the website and are looking at opportunities to add children's clothing.  Smart move! Women browsing the website can find clothing not only for themselves but also for their partners and their children.  Tamsin are investigating the possibility of expanding the site services into Hungary and Poland, where their research indicates they can find a similar customer base. No firm decision has been made yet. Marcus told me last year that cross border expansion was an objective.  However, he needs to ensure he can setup a logistics infrastructure to support the business and of course, the website needs to be translated.  Marcus wants to ensure the business is on a stable footing in the Czech Republic and Slovakia before he goes into new countries. Marcus seems to share my view that  adding men's and children's lines to the website is less capital intensive and can generate income faster launching in a new country.

9. Numbers and cash flow complete the story.  Sales have risen to nearly 1.5 mn CZK (EUR 60,000) per month.  Tamsin reported nearly EUR 18,000 in profits in the Czech Republic last year and a further GBP 17,000 in the UK.  The business is clearly profitable. The major IT development of building and deploying the website is complete, so the largest fixed costs already absorbed.  The next level of cost is incremental - translation of the website and addition of more product lines.  There is practically no long term debt in the business.  The company was funded largely from equity capital and shareholder loans from Marcus and Lenka.

10. A P2P loan supports business expansion.  The rapid growth of the business means more working capital is required to support sales in process.  Many retailers require an inventory of goods on the shelf.  Tamsin requires little in terms of goods on the shelf but still must finance the payment cycle.  Customers order goods, Tamsin purchases the goods and delivers them, Tamsin then collects the cash.  Last year the sales base was nearly EUR 12,500 per month.  This year the sales base is over EUR 60,000 per month. 

11. Tamins' working capital need is counter cyclical.  If sales decline Tamsin needs less cash to support the sales cycle so their cash so working capital would be freed up. Contrast that with traditional bricks and mortar retailers, where a decline in sales creates an inventory overhang and makes stock replenishment more difficult.

12. The debt is sustainable. With profits of nearly EUR 40,000 annually, Tamsin should have more than enough free cash to pay interest and amortise down the P2P loan we designed for them, which has a five year term.

Incidentally, I made a point above of describing Lenka as being soft spoken.  Upon meeting Lenka I was reminded of  Good to Great ,written by James Collins.  It's a wonderful read.  Collins finds a common thread among the leaders who developed great companies.  The truly great people among us are high on performance, low on ego.  This doesn't mean they have no self-confidence.  On the contrary, their self-confidence is strong enough that they really feel no need to draw attention to themselves. In the words of Collins:

“The good-to-great leaders never wanted to become larger-than-life heroes. They never aspired to be put on a pedestal or become unreachable icons. They were seemingly ordinary people quietly producing extraordinary results.”

As with any investment, there is no guarantee of success.  We encourage investors in P2P loans to diversify their portfolios and invest no more into any particular loan than they would be willing to lose. We hope to be able to report in the coming months and years good results from companies on our platform such as Tamsin.

Special thanks to Marcus, Lenka and Michal for their inspiration.

Questions?  Comments?  e-mail me at