The biggest banks in the UK run hundreds of branches and employ thousands of staff. Why is it so hard to get their attention? And why does it take so long? These mounting frustrations among small businesses motivated a group of university friends to think up a new way to unblock the flow of credit.
In 2010, they launched Funding Circle, an online platform for savers to lend directly to small businesses. A loan of between £5,000 and £1 million ($8,100 and $1.6 million) can close in a week on the platform, whereas it often takes months of back and forth with banks to get a decision. Funding Circle’s relative speed is made possible by a combination of experienced risk management experts and the wealth of data that businesses now leave on the web—online reviews are an excellent indication of a restaurant’s prospects, for example. The peer-to-peer lender’s bad debt ratio is only 1.5% over the past three years.
Meanwhile, thank to their previous overreach and strict new regulations, the UK’s biggest banks have pulled back sharply on small-business loans in order to nurse balance sheets back to health. James Meekings, one of Funding Circle’s co-founders, says that the “time was right” for the firm to step into the breach.
Crossing the pond
More than 57,000 people have signed up to the platform, sponsoring around 3,000 loans worth £166 million ($269 million). Today the company announced that it is expanding into the US, taking over smaller, younger startup Endurance Lending Network, based in San Francisco. A new round of venture funding, worth $37 million, will finance the company’s expansion across the Atlantic. The company has raised $58 million in funding to date.
In the UK, Funding Circle’s typical loan rates—the average is a 9% interest rate on a loan for a bit less than four years—are roughly the same as those offered by banks. What draws borrowers to the platform instead is the speed of a loan decision; despite official attempts to unblock the flow of credit, British banks part with capital grudgingly. This is also a problem in the US, albeit not to the same degree, but Meekings is confident that his firm can also offer lower interest rates than the banks that operate in America’s more fragmented lending landscape.
Meekings, who handles marketing for the 80-person firm, emphasizes the “sense of community and affinity” that comes from supporting small businesses. Half of investors on the site browse the profiles of companies looking for loans before making a decision. The other half are more interested in the returns on offer, with a net 5.8% rate beating most savings accounts in the market, and just let the system automatically spread their money across at least 100 loans. The company imposed minimum bid rates recently, because many investors were so keen to lend that they were willing to offer interest rates well below what was prudent for loans in certain risk bands.
Funding Circle’s average investor—who can bid as little as £20—loans out £6,000 at a time. But these small savers are not driving the company’s rapid growth. The reason the company’s loan book is tripling every year—which earns the firm a 1% cut from investors and up to 4% from borrowers—is that big institutions want in on the act.
In March, one of the biggest institutions of all, the British government, pledged to lend £20 million via Funding Circle, sponsoring 20% of every loan on the platform. It has spent £16 million of these funds so far, with local councils, university endowments and other asset managers also channeling big chunks of funds through the site. “People with capital to deploy now see this as a new asset class which wasn’t previously open to them,” Meekings says. “This allows us to grow at a quicker pace.” It also redefines the common perception of “peer” in peer-to-peer lending; encompassing large asset managers and even the UK treasury.
The rules on peer-to-peer lending the US already restrict Funding Circle from only accepting money from wealthy individuals and institutions, but a proposal earlier this week from the SEC to regulate crowdfunding might reverse this barrier. The company also operates in something of a regulatory gray area in the UK, but an official consultation on the peer-to-peer lending sector, launched today, may bring it under mainstream supervision.
Given that the company has seen its biggest success with large, sophisticated investors, these new rules, which aim to protect small savers, might not matter. Funding Circle even recently held talks with banking giant Santander about teaming up to provide certain types of small business loans. It’s a true sign of a thoroughly disrupted a sector when one of the main targets wants in on the act.