[Editor's Note] Milos Bezanov is a second year student currently studying International Politics at King’s College London.
As an alternative to banking. Funding Circle was launched on Friday 13th August 2010 by James Meekings, Samir Desai and Andrew Mulligan, all with experience in the financial sector. The versatility of the business model cuts banks out entirely from the lending process. It’s easy to see James Meekings reasoning.
The Business Model
The business model is very simple; funding circle uses an online platform to match businesses and individuals looking to borrow with investors looking to lend. The site acts as a go between, and a team of qualified former bankers carefully vets all the businesses coming in, assessing their creditworthiness. Similar to eBay, the lenders then compete to offer the lowest rate of interest to these businesses. Lenders can “autobid”, where they set their account to automatically bid for random businesses at a set interest rate, or they can select businesses individually. Once repayments are made, incoming money is automatically used to bid for more businesses. Alternatively, lenders can still choose to personally select businesses/interest rates. Although simple, it is not unique, as sites like Zopa and Ratesetter already use similar technology, but what is unique is the approach.
Market & Growth
The four largest banks control 92% of the lending market, however small businesses lose out most as, unlike big businesses, they cannot access equity or bond markets. Funding Circle does just this, it creates something similar to an online bond market for small businesses to raise capital. This focus not only taps into a space large high street banks previously ignored, but it speeds up the process of obtaining capital (James Meekings); “As a small business owner I have very little time on my hands, and that's the most important thing I have, my time”. Funding Circle offers 24 hour access to an online platform at the convenience of the user, by comparison approaching a bank is a bureaucratic and time consuming process. Also, facilitating links between borrowers and lenders provides a social element; “I liked the concept...actually feeling that human beings were investing in the business” (Mark Thompson, Funding circle user). Clearly all this is not pure conjecture, as Funding Circle has continued to grow, lending to 670 businesses and achieving annual growth of 400%.
The transparency of the business model is what creates this social aspect, “ you share the adventure, rather than dealing with a faceless computer”. As a businessman, actually seeing where the money is coming from and who is investing shows you that there are people not just looking for profit, but who appreciate what you do and wish for you to continue. But there are risks. If a business defaults, then losses are burn entirely by the lender, and given that few would trust bankers with even a fiver now, breaking the trust barrier is problematic. Nevertheless, there are extensive credit checking measures in place. Businesses are vetted according to “affordability” and “credit quality; the size and performance of the business, and the strength of the business. Businesses are marked either as A+, A and B, where A+ is the most reliable and B the least. Interest rates vary according to risk, so lenders don't lose out by going for the lower bands. Also, risk can be reduced by diversifying lending; instead of investing £400 in one business, you can lend £20 to 20. These are just some of the ways Funding Circle have attempted to work around the problems of trust. Again, recent success suggests they should keep at it.
However, it's still too early to tell how successful of both the business and the business model. Even assuming the business model catches on, James Meekings admits that there is no reason why big banks won't force their way into this niche. With their established connections, and high market share, this would pose problems. Furthermore, given that most loans are made on one and three year terms, the latter only start being paid back in August 2013, making it difficult to gauge Funding Circle's success at this point. Nevertheless, there are undeniable advantages to an online platform as opposed to a bank. Funding Circle's rise proves this, and whilst it's still too early to tell, at least this much is clear; lending money has never been this transparent and hassle free.