Bad Debts/Recoveries

19% is an improvement on what it used to be from what I recall. A deeper analsysis - when done in the past - shows that the recovery rate (by value) is also HEAVILY biased by a few outliers of full or high percentage recovery. How true that still is I don't know: my recollection is that I last looked at this 8-12 months ago. those figures also included one which was in fact a payback by FC due to implied f***d by the borrower (on which payback is covered by Ts and Cs).

Best thing you can do is try to dodge the loans that fail. There will always be a proportion that do. I appreciate this is easier said than done, but there is a lot of information floating around in the public domain these days. When it comes to balance sheet strength, I tend to use the current ratio to make a quick check of the company's means to meet its short term obligations:

www.investopedia.com/terms/c/currentratio.asp

Nothing is foolproof, and it's also worth noting that companies with longer inventory holding times such as Tescos, frequently have a current ratio below one. In the case of Tescos, this is not a problem. It just reflects the fact that they have to consistently keep their shelves full ahead of sales of the actual products to customers. There will always be a lag before an item in inventory is sold. This is my understanding of the ratio anyway, but I'd welcome any further examples from people.

On FC, we have the pleasure of helping keep some of Britain's smaller companies in business though, so an assessment of each company's ability to meet its short term obligations is no bad thing. I appreciate that this is largely either historical information (in the case of filed accounts) or management accounts (which can be open to interpretation), but it's better than nothing at all. Seems to have served me pretty well so far this year anyway; only suffered three defaults and most were sub-£20. 

No expert, not an accountant. Though I did weedle (is that a word ?) on to a basic 2 day 'understanding accounts' (and other things) session paid for by my employer: the main reason I wanted to go was to be a bit more enlightened for the purposes of p2p activities doing my job.

This wasn't my understanding in the case of e.g. supermarkets. Inventory times are in fact much much shorter than most other businesses (you don't want your cabbage sitting in a warehouse for the same length of time that the raw materials for some piece of machinery might be sitting there). And of course the big supermarkets are the masters of managing inventory and just in time delivery.

The contrast compared to other business is that is so hugely cash generative, and their inventory is short hold NOT long hold, and in addition they will have negotiated longer payment terms with their suppliers: so their stock is sitting there for a much shorter period then when they have to pay for it.  They don't have a meaningful debtors balance sheet: ok people rarely pay with cash these days, but the clearance time on card transactions is short.

Similar with say a hairdressor: they will have stock (especially if they are also dabbling in retail sales of product) but all their transactions are cash. So no debtors on the books.

In a nut, and simplifying, your current assets are assets which you have which you should realise in the 12 month period: debtors (no 30-60-90 payments terms at Tesco's or your hairdressers) and stock which you will shift in 12 months: no stuff sitting in Tesco's warehouse 11 months after they acquired it).

Thanks guys for your comments. You sure put a different perspective on the subject other than just depending on the raw figures from FC statistics. I had previously assumed that the predicted failure rates would be roughly similar to the A to C categories of the loans. It looks like failures may in fact be running a little lower than FC predicted. However we really will not know the complete answer until a lot more loans have run their full course. Am I guessing right?

The rapid growth of the FC platform is making the default performance look much better than it actually is. I will post some stats in the next few days if I get time. My view is that the impact of defaults over the lifetime of a loan is a reduction in annual return of around 3% - so 50% worse that the FC guideline.

@ maxmarengo
I look forward to your numbers, and to finding out how you have derived them. The only way I can think of is from monthly downloads of FC's portfolio, going back a long time, which I don't have unfortunately.

If you are right, this bodes very badly for the future of FC. I'd expect any sophisticated investor, armed with this information, to adopt a strategy of selling after X months before the tail end losses start to bite. At which point the losses end up even more concentrated in the hands of the less sophisticated / autobidders, and the FCA might step in to regulate or close the secondary market for their protection.

I too look forward to seeing @ maxmarengo's numbers and I also agree with what you say about selling before the tail catch comes round to bit you. In support of this there is a well quoted statistic suggesting that most loans fail at around 2.7 years in. Just how and where this comes from I do not know but I sure would like to know!