New start-up Funding Circle offers a populist ethos: the removal of banks from small business lending. Co-founders James Meekings, Andrew Mullinger and Samir Desai have developed an online platform for the public to lend money direct to SMEs
It’s a social lending service, says Meekings. “Funding Circle is about reconnecting the community: the businesses on one side who are crying out for affordable finance, and the lenders on the other hand who’ve got the savings but are not getting the return at the moment, and matching them up in a transparent way.”
To spread the risk, lenders are encouraged to lend to a portfolio of different businesses, while businesses borrow from lots of different lenders to get the lowest possible rate. That’s provided the fund can attract both lenders and borrowers in sufficient numbers. The business will take time to grow, not least because its founders are keen to minimise the number of defaults. It’s a critical point, says Meekings. “Our model is all about established and creditworthy businesses. A lot of start-ups want capital, but that’s not what we’re about.”
Borrowers must have been trading for at least two years to qualify, says Mullinger. "Where we need to we will get personal guarantees," he says. "We run the same processes that a bank will use."
The expected rate of return is attractive at between six and nine per cent, depending on an investor’s appetite for risk. There are three risk bands: A+, A and B. The risk of default varies between 0.6 per cent for A+ to 2.3 per cent for B, explains Mullinger. So if you choose to lend to A+ businesses, and your annual return is 6.6 per cent, you’ll get six per cent back. “We’re trying to be very transparent,” he explains. Larger portfolios carry the least risk. “The more businesses you spread across the more likely it will be that one will default, but the impact of that default will be much less.”
Funding Circle makes its money out of a one per cent annual servicing fee—which is only collected if a borrower makes all its monthly repayments—and a one per cent loan sale fee, payable when investors need to access their loan capital and sell parts of their loans to other investors.
Meekings says there is a degree of education required in teaching the public about what he describes as a new asset class. “When people think about lending to small businesses at the moment they think Dragons Den and equity investing, but to do that you need a lot of money and you need to spend a lot of time with the [borrower]. What we’re trying to do is create a different model where the business is already vetted, you a spread your money across lots of businesses and you spend less time looking at each individual business.”
Funding Circle’s launch feels like good timing. As a process, “disintermediation” of the banks—literally the removal of the middle man—will no doubt benefit from public dissatisfaction with the banking system. Although financial returns come first, this is very much a social enterprise, says Meekings. “We are more of a social enterprise than a normal bank. Our research showed people wanted to lend to small businesses, but more than that they wanted to lend to SMEs in their region. If you lend to a bank, a small amount of money will stay in the region but the rest is spread around the world. With us you can choose your lending profile to benefit only local businesses.”
The company appears to enjoy a good balance of experience. Mullinger is a former risk management consultant at Ernst and Young, while Meekings worked as a Web usability consultant at OC&C. Desai has private equity experience. Mullinger admits adjustment to life in a start-up has been short and sharp. “At larger companies the offices are always the perfect temperature, everything works, everything happens as it should. When you first start up you realise that when the heating doesn’t work, you just get cold.”
