How does Funding Circle work?Businesses come to Funding Circle when they’re looking for finance. With banks they have to wait a long period of time. What they want is access to finance with transparency and a quick application. We’ve found businesses owners look for clarity and speed of decision over almost anything else. We process all applications within two working days and 50 per cent in less than 48 hours. The reason we can do that is we have a lot of publically available data and we know whether they meet our minimum criteria within 20 minutes – it’s better we tell you if we can’t help you straight away. We then review the application manually and through our internal credit team. If a business is successful it’s then listed on our marketplace where investors choose what to invest in. Each business is given a credit rating ranging from A+ to C- and that credit band is indicative to the rates, which range 6-15 per cent.
What types of businesses have applied?The spectrum of business is very broad. We think it works across all sectors and the businesses range from big manufacturing firms to fish and chip shops. It’s amazing how many interesting businesses there are out there, things like Moo Free Chocolates [which sells dairy free chocolates] which have been hugely successful. The average amount invested is 65k – we’re talking about the S of SMEs.
How many businesses have taken part so far and what growth do you expect?Around 6,000 businesses and 10-20 per cent of these have taken multiple loans, so it’s 6,300-6,400 total loans. Were’ doubling every year and we expect that to step up. We run awareness studies and the number of people that are aware of Funding Circle is quite low – about 5 per cent. The sector is dominated by large banks and before Funding Circle it was impossible to apply online for a business loan. We are lending £30 million a month and we estimate the total SME lending market is £75 billion a month. That means there’s a huge opportunity and it could become a small business bond market.
Can you explain what the credit assessment team does?We try to have an open policy. Businesses submit information online. The minimum requirement is typically an annual turnover of at least £50,000 and two years of accounts. If they require more information the credit team gets in touch personally.
What about start-ups? Could the system ever work for new businesses?I think we have to look at what’s the best type of finance when you’re starting out. If the business has only just launched can it make monthly payments? These are two slightly different markets and also we use data and they don’t have that.
How many companies have defaulted and what happens?We say to investors expect annualised losses of around 2 per cent. The current bad debt rate is 1.4 per cent. It’s important to factor in expected losses. It’s important to know it’s not a savings account, that there is a level of risk. We have an in-house collections team. We want as many businesses to service the debt as possible. When businesses get into difficulty working with them is very important. We spend a lot of time working with businesses much earlier on. Naturally there are times when they can’t repay their loans and if there is a need to go down a legal route we do that.
How does Funding Circle make money?We charge a 2-4 per cent arrangement fee, which is taken off the amount you borrow. For example, if you borrow £100,000 we take 3 per cent and you receive £97,000. For the investors we charge an annualised rate of 1 per cent on what you’re paid back.
What’s the future of peer-to-peer lending and Funding Circle?It’s a really interesting time for the industry. The businesses are committed to the market and are being transparent. The most important way to win is to provide as much information to companies that want to borrow money and as much visibility as possible to investors. This is a really interesting time for Funding Circle. We have a partnership with Santander and we expect more [of these kind of arrangements] over time. We are also expanding overseas.
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