Ripples of fear are spreading across online peer to peer lending and crowdfunding platforms as more signs of failing investments become public.
The latest victim is the US online lending platform CircleBack.
The firm has ceased lending as cash from investors dried up on reports of borrowers defaulting on their loan repayments.
CircleBack CEO Michael Solomon told Bloomberg: “We are not originating loans at this time.”
He also explained if funding was no longer available, the firm’s loans would be transferred to a management and collections company.
P2P lending risks
The business model was to borrow funds from equity investors that were then loaned to US consumers at interest rates ranging from 6.6% to 35%.
However, investors were concerned that losses were running at 13.5%.
Although CircleLending only took money from institutional investors, many other online platforms in the UK and US follow a similar lending model but raise cash from small, private investors.
Peer to peer lending is also big business in Britain, where the leading platforms have put together funding of millions of pounds.
However, to date, although posting information about loans and customers, details about defaults and missed payments has been less forthcoming from online platforms.
Investors who have staked cash run the risk of losing their money if their deals go wrong as P2P lending falls outside the scope of a regulated loan that comes with Financial Services Compensation Scheme security.
Another concern is crowdfunding equity valuations.
Crowdfunding share valuation concerns
Cited as one of the fastest growing sectors in the alternative finance industry, crowdfunding is where investors pool their cash and buy shares in a business.
In 2014, Adnams Brewery posted accounts showing £66 million revenue with a £3.8 million operating profit and market cap on shares of £32 million.
Crowdfunded start-up BrewDog posted £29.6 million revenue with a £3.8 million operating profit, but was valued at £305 million.
The valuations show the difference between share prices paid by private investors compared with professionals.
Earlier in the year, one of Britain’s largest crowdfunding platforms Seedrs published a report revealing out of 253 equity deals on the site, just over a third (93 companies) have seen their share values increase. The average return for these investors was 14%.
Chief executive Jeff Lynn explained that the report offered ‘a genuine reflection of the current value of investments’.