Why do 1 in 3 Nucleus borrowers end up in insolvency?

I’ve analysed 6.7 million companies incorporated between 1416 and 2020. 234 have had “Nucleus” listed as a charge holder (see appendix for a list of charge holder names).

• 153 (65.4%) have no history of insolvency.
• 8 (3.4%) had a history of insolvency prior to Nucleus being a charge holder.
• 73 (31.2%) first entered some form of insolvency proceedings after the registration of a charge by Nucleus.

Of the 8 with a history of insolvency prior to a charge being registered by Nucleus, 2 are currently in receivership, 2 are dissolved and 4 are active.

Analysing the level of insolvencies post charge registration is a great way to indicate how aggressive your lender is likely to be with regard to collecting defaults.

Current status for companies in the population

As you dig deeper it doesn’t appear to get much better. Particularly if you’re a borrower that’s just about to climb into bed with Nucleus.

Time normalisation of data

To discount the timing mismatch of various loan origination dates, we’ll look at the time (in months) between charge registration and insolvency action starting. This will make comparisons to other lenders in future articles more enlightening.

The above graphs look at insolvency action against each charge registered, not against unique borrowers. Each legal entity can have one or more charges from multiple lenders, often registered months or years apart.

Call Outs

• 7% of the population have a history of insolvency prior to Nucleus becoming a charge holder. They are labelled “prior” and included for completion.
• 21% of insolvency actions start within three months of the charge being created. Either Nucleus had their credit decisioning badly wrong or their strategy could be “high volume, high interest, high defaults, great collections”
• The spike at seven and fifteen months is largely driven by one group that appears to have hit the skids.

Larger loans

Nucleus advertises loans of up to £50,000,000 (I suspect the average ticket size is mid-six figures to low seven). I don’t know how many loans they’ve written of this size but I can make sense of an argument that insolvency is a better route for the recovery of high-value loans.

I would imagine the owners and directors of a business seeking a £50M facility from Nucleus don’t have personal assets anywhere near £50M, therefore insolvency as a primary recovery route seems to make sense.

I’ll use Iwoca for comparison because my next article is on them. Spoiler alert: Iwoca has insolvency rates dramatically lower than Nucleus. Iwoca advertises loans of up to £750,000 but I suspect the average ticket is much lower. Perhaps mid-five to low six figures.

Insolvency as a primary route to recovery for smaller ticket loans doesn’t make as much sense compared to bigger ticket loans. There isn’t an economy of scale, and smaller loans can be collected out of personal assets easier, even more so if the business has no assets to liquidate!

I’m not saying using personal guarantees as a primary route of recovery is good. I’m just stating that I understand the argument that smaller ticket lenders may gain more comfort from a PG than a charge.

I suspect the difference in loan size is a factor in explaining the insolvency rate difference between Iwoca and Nucleus clients but I don’t think it explains it anywhere near its entirety.

In defence of Nucleus

The majority of their borrowers don’t end up in insolvency and it’s worth noting I’m only looking at loans with charges. Maybe their unsecured book is in rude health. Perhaps without the help of lenders like Nucleus insolvency rates for this pool of businesses would have been greater than one-third.

What's next?

This is the first in a series of articles on what to look for in potential lenders. In future articles I will explain why the borrower insolvency rate difference between Nucleus and Iwoca borrowers is so wide by covering:

• Loan stacking
• Second and third charge lending Vs first charge
• Interest-only Vs ammortising
• Top-ups
• Lessons from my machine learning borrower insolvency model

If you’re in the lending, insolvency, or turnaround profession I’d love to read your comments. Especially if you have any other angles you’d like me to include.

Appendix

Nucleus Business Cash Advance Limited
Nucleus Cash Flow Finance Limited
Nucleus Commercial Fiance Limited (SIC)
Nucleus Commercial Finance Limited
Nucleus Commercial FINANCE1 Limited
Nucleus Commercial FINANCE1 LTD
Nucleus Commerical Finance Limited
Nucleus Commerical FINANCE1 Limited (SIC)
Nucleus Property Finance Limited
Nucleus Property FINANCE1 Limited