30th September 2021
To help investors understand the riskiness of an investment we present 2 risk gradings. These gradings are linked to the risk associated with the loan, and the price is set accordingly.
In addition to these gradings, we’ve also introduced a new credit risk indicator measured using some additional details over and above the Equifax grading which is the primary indicator of risk.
Product risk grading
Crowd2Fund has various investment products such as fixed-term loans, interest-only loans, revenue loans, equity, and donations.
Our product risk refers to the indicative risk, these investment products generally have and is not directly linked to the credit risk of the businesses you are investing in.
For example, investing through equity is typically a much higher risk than investing through a fixed-term loan offered to an established profitable business. The product risk is shown on the opportunities listing page and campaign page.
Equifax credit scores
Every business has an Equifax rating shown on the campaign page. On existing campaigns, it is updated on a quarterly basis and for new listings, the most recent Equifax rating is displayed.
Equifax is a credit reference agency and provides ratings across the financial services industry to help lenders make informed decisions.
The Equifax rating is shown as a number between 1 – 100 and letters A through to F, with a lower number or letter being a poorer Equifax score and a higher number or letter a better Equifax score.
You can learn more about how the Equifax score is calculated here and indicates the financial health of a business listing.
Crowd2Fund Credit risk indicator
The Crowd2Fund credit risk indicator is shown as five different colour gradings. To calculate the credit risk indicator, we use the Equifax score objectively as a baseline and then we adjust our risk assessment based on specific characteristics of the loan which Equifax can’t do. Each of the elements listed below carries a different weighting depending on how much or how little we believe they impact the overall risk of a listed opportunity.
Equifax score: This is the 3rd party business credit rating ranging from 0 to 100 and is calculated in a sophisticated way by Equifax, who are well recognised within the financial services industry. This is shown on the campaign page and has a very high level of weighting for the credit risk indicator.
Security: This is the level of security the investment has with tangible assets and level of coverage the estimated value of the security has from 0% to 100% for the loan. This has a higher weighting within our calculation.
Director guarantee: This is the level of coverage we estimate the director(s) assets cover the investment from 0% to 100%. This has medium weighting within our calculation.
Product type: This is how the product type increase or decrease the level of risk of an investment. This has medium weighting within our calculation.
Term: This is how long the term of the investment impacts the level of risk, with shorter-term loans reducing the risk of a loan and a longer-term increasing the risk. This has lower weighting within our calculation.
Director(s) credit score: This is how the average personal credit scores of the directors impact the level of risk with a loan, with higher scores reducing the risk. This has lower weighting within our calculation.
Other variables we assess during the credit review process are considered within the business Equifax score such as the sector or company financials. Equifax scores are calculated with a high degree of sophistication, hence why we try to keep the credit risk indicator relatively simple.
We may list an opportunity that has a low Equifax grade and score, but Crowd2Fund may have mitigated the risk through additional security, such as a director guarantee or a debenture and therefore the credit risk indicator will reflect this. The Equifax score, product type and credit risk indicator should all be considered before making an investment. Crowd2Fund also sets borrower pricing based on both market conditions and the level of risk associated with each transaction.
There are five credit risk indicators from light green being much lower risk and dark red being much higher risk and the spectrum is as follows:
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It is important to consider all IFISA investments and generally any P2P investments as high risk, therefore our credit risk indicator is relative to other investments listed on the platform.
Please bear in mind that the information we provide about businesses are indicators an investor can use to help make an informed investment decision and a full credit analysis is completed by an underwriter prior to any listing.
There is always the risk that a business fails to perform satisfactorily, irrespective of the indicators, due to variables such as market conditions, industry performance, business resilience and other idiosyncratic risks. This means, that in an entire portfolio, while statistically lower risk transactions have a lower probability of loss, individual high-grade loans can default. It is important that investors consider diversifying their portfolio to establish an adequate balance of investments.
We hope this article has been insightful and clearly explains how you can use the information on campaign pages to make your investment decision. Remember though it’s really important to build a diversified portfolio and adjust your investment amounts based on your risk appetite.
