Growth Street Review
Growth Street is a peer to peer lending (P2P) platform with a unique slant on the business lending market. Borrowers are offered a line of credit similar to that of an overdraft and investors are able to invest in loans which are sanctioned under the line of credit agreements. The beauty of investing through Growth Street is that the term of the loans is very short, under 30 days in duration, which delivers inherent investor liquidity into the product. Investors are able to access their funds within 30 days when loans are paid off or reinvest capital into new loans. We’ve started a trial of the investment product and keen to provide some feedback.
|Cumulative Lending||£70.6 million|
|Total Investor Deposits||£28.8 million|
|Early Access||Yes, loan terms are 30 days so investors can gain access to funds within 30 days.|
|Loan Type||Business loans (SME) Lines of credit to the borrower|
|Loan Security||Asset security on all loans|
|Fees||No investor fees|
|FCA Registered||Fully Authorised|
Figure 1: Growth Street key facts
Growth Street’s Loan Loss Provision (Provision Fund) is central to its investor offering. Similar to RateSetter’s Provision fund, the Growth Street Loan Loss Provision pays investors automatically in the event of a borrower being late with a repayment or when it is likely that the original funds lent are irrecoverable.
The availability of the Loan Loss Provision mitigates the need for diversification across a large number of borrowers on the platform, as defaults are automatically covered by the fund. The risks are the same whether your funds are matched to one borrower or many borrowers.
My entire £1,000 investment was matched within half a day to a single loan contract with a 30-day term. Normally, this level of diversification would be a concern but if the repayments are late the Loan Loss Provision fund should cover the loss.
The loan I was matched to has a rate of 5.18% which is slightly below the advertised rate of 5.3%. The advertised rate assumes that investors’ funds are continually reinvested into new loans with no time lag in between one loan being repaid and another starting. Over the year it is possible that my funds will be matched to slightly higher rate loans to achieve the 5.3%. With this loan, my funds were matched within half a day, which is impressive, however if delays in the matching time increased this could impact the return. On Growth Street’s matching page investors are able to view both the current estimated time to match funds and the deployment rate, defined as the percentage of investors’ funds currently matched to borrowers earning interest.
Figure 2: Growth Street Dashboard
What are the risks?
The principal risk when investing on the Growth Street platform is that a large number of borrowers default on their loans which resultantly consumes the Loan Loss Provision. If this was to occur, Growth Street would call a ‘Resolution Event’ where all outstanding loan contracts are assigned to the Loan Loss Provision and all repayments are collected by the Loan Loss Provision. Again, this works in a similar manner to the RateSetter provision fund.
The Loan Loss Provision has a current balance of £1.1 million, providing coverage to 5.9% of the total loans outstanding. Essentially, 5.9% of the amount currently lent out would have to default before the Loan Loss Provision is consumed. The expected default rate across the loan book is 3.3%.
The other major risk when investing with Growth Street is that the company becomes financially unstable and ceases trading. Although Growth Street has a fully funded run-off plan that would kick in allowing for the borrowers to continue with their repayments of their loans, this event would cause turbulence for investors.
What are you investing in?
Growth Street provides a line of credit to businesses for working capital and cash flow purposes. It works like an overdraft where businesses can dip in and out each month to fund the purchasing of stock and hiring. Borrowers typically pay 7.2% of lending amounts ranging from £25k to £2m. Most loans are secured by a charge on all business assets, but in some instances Growth Street may ask the directors to provide personal guarantees, alongside or instead of a debenture.
The sign-up process
With only one investor product to choose from the process of investing is simple and funds appear to be matched very quickly. The website is clear, factual and provides an in-depth overview of what the investor is investing in. Investors are, however, required to self-certify as a high net worth, sophisticated investor or restricted investor and complete an appropriateness test during the sign-up process which takes extra time.
Growth Street benefits
- Access within 30 days linked to the loan terms
- Provision fund provides diversification across the loan book and provides consistent stable returns
- £70.6 million of cumulative lending since launching in 2016
- Very simple product offering
- Factual, descriptive website
- Hands off investing
Growth Street considerations
- No Innovative Finance ISA
- Limited control which might not appeal to certain investors
- The provision fund reduces investor returns as a % of the borrower repayments sit idle waiting to cover defaults
- Longer sign up process
One of the big push backs within the peer to peer lending sector is liquidity. By offering borrowers lines of credits, loan terms are 30 days or less. It’s a unique proposition that has liquidity inherently built into the investment offering. The presence of the provision fund further mutes the impacts of any defaults providing stable, consistent returns, which combined with a hands-off approach to investing, might appeal to investors who are more time precious.