Funding Circle

Funding Circle is an online marketplace which allows savers to lend money directly to small and medium sized businesses. Funding Circle was the first site to use the process of peer-to-peer lending for business funding in the UK, and now operates in both the UK and US markets. As of February 2014, Funding Circle had facilitated £223 million in loans to small and medium sized firms.

History

Funding Circle was set up in the UK in August 2010. It was launched at a time when small businesses were struggling to obtain finance from traditional channels. In its first 10 weeks lenders used the platform to lend more than £1 million to small businesses.

It received £2.5 million in funding from Index Ventures in April 2011. In March 2012 Funding Circle closed a series B round of £10 million led by Index Ventures and Union Square Ventures.

A report published by Nesta in April 2013 found widespread preference for online lending over traditional banks among existing Funding Circle users. 77 per cent of businesses that borrow through Funding Circle said they were ‘likely or very likely’ to approach the peer-to-peer lender for a loan first, rather than go to a bank.

By September 2013 Funding Circle had trebled in size and announced it had facilitated over £150 million of loans since it launched. In October 2013, Funding Circle announced that it had raised a $37 million investment. Accel Partners led this round of funding, which brings the company’s total to $58 million. New investor Ribbit Capital contributed, along with existing investors Union Square Ventures and Index Ventures. Additionally, Funding Circle announced it was launching in the US and joined forces with Endurance Lending Network. Endurance now trades under the Funding Circle name. Since launching more than 50,000 people have registered at Funding Circle. Investors now include local councils, universities and the British Government.

Business Model

Funding Circle provides a platform where investors can browse businesses that Funding Circle has credit assessed and approved for lending. Businesses submit an application which is reviewed by Funding Circle credit assessors. Once approved, businesses post their loan request on the Funding Circle marketplace. Here, investors choose which type of businesses to lend to, and through an auction process, bid the amount of money they wish to lend, and the interest rate they want to earn. Loan auctions typically take seven days. After the business accepts a loan, they make one repayment each month which is collected by Funding Circle and distributed to all the investors. Loan requests are typically made up of lots of investors each bidding small amounts on hundreds of different businesses to spread their risk.

Funding Circle also has an Autobid function, where the system automatically places bids according to the criteria investors have set. Investors can choose the average rate they wish to offer, which types of businesses they want to lend to, and the maximum percentage of their portfolio to be lent to any one business.

Investors can build up their portfolios quickly by buying parts of existing loans from other investors via the secondary market. Similarly, if investors need to withdraw money at any point, all or part of the investment can be sold via the secondary market. Alternatively investors can choose to withdraw their money gradually as they receive their monthly repayments. In the UK, loan lengths start at the 6 month mark and go up to 5 years. Businesses can borrow between £5k and £1M to finance working capital, expansion capital, asset finance and one off business expenses.

Risk and regulation

If a borrower fails to fully repay the loan then the lender risks losing part of his or her return. To mitigate against this, Funding Circle recommends that users lend to at least 100 businesses equally. This can be done with as little as £2,000 – i.e. lending £20 to 100 businesses.

In the UK any established and creditworthy business currently operating can apply for a loan at Funding Circle, including partnerships, limited companies and sole traders. Businesses must have at least 2 years of filed or formally prepared accounts and have no outstanding County Court Judgements over £250. A minimum turnover of £100,000 is also required.

Funding Circle use many of the same credit checks as the high street banks to ensure only strong, healthy and creditworthy businesses can post a loan request. This includes an Experian check, whilst also splitting businesses into five risk bands (A+, A, B, C, and C-). If a business defaults, Funding Circle will pursue the business owner to recover the remaining part of the loan on behalf of the investors.

In partnership with Zopa and RateSetter, Funding Circle launched a trade body, the P2P Finance Association, with the stated goal of "ensuring high minimum standards of protection" for lenders and borrowers in the industry. The association will also lobby the UK Government to regulate the industry itself. The Government has since ruled that peer-to-peer lending and borrowing activities will be overseen by the UK’s new market regulator, the Financial Conduct Authority, from April 2014.

Returns

Because lenders choose to which businesses and at what rate they lend, returns for lenders using Funding Circle vary from person to person. However, during the first year from when the company was founded in August 2010, lenders received an average return of 8.3 per cent before fees and taxes. As of September 2013 Funding Circle advertise an average return of 5.8% after fees and bad debt.

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Facts

Reported Return: 6.40%
High Risk Yield: 8.00%
Medium Risk Yield: 7.60%
Low Risk Yield: 7.30%

Total Loans Funded: 567M
Average Service Fee: 1.00%

Loan Terms

6 Months
12 Months
24 Months
36 Months
48 Months
60 Months

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