When news emerged last summer that peer-to-peer lender Funding Circle was in discussions with Santander, it seemed an extraordinary volte-face for a firm that had adopted a firm anti-establishment stance since launch and the tagline “no thanks, banks”.
The firm, which was launched in 2010, has markedly softened its stance towards the industry since then, and the future is now one of collaboration rather than confrontation. It is now talking to other lenders about the potential for partnership.
“We are having exploratory conversations with banks, hedge funds and family offices,” says James Meekings, CMO and co-founder of the business.
“We are not evangelical – we are not saying that all banks are evil. At the top level we have the same approach of getting money into businesses – that is why we are here. This has previously been a banking product and we are now constructing a new asset class.
“We will be collaborative with the banks – we will be frenemies.”
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| James Meekings, CMO and co-founder of Funding Circle |
Euromoney meets Meekings at Funding Circle’s Blackfriars-based offices in London, a relaxed and informal environment where the 80 youthful employees fit in games of table tennis between analyzing requests for funding. “Several banks have come to us and asked how can we work together,” says Meekings.
Discussions revolve around Funding Circle taking on a proportion of the banks’ SME loan exposure. “The banks want to part lend in order to keep the company happy,” he says. “The value for them is in the customer – they don’t make money from lending, they make it from ancillary services such as FX.
“So passing a portion of the lending to Funding Circle and keeping the ancillary business makes sense for them. It is like securitization on a loan-by-loan basis.”
By October, Funding Circle had lent $158 million to small businesses via 55,000 investors. It offers lenders a 5.8% average net return on their investment and borrowers interest rates that start at 6%. The average loan size is £65,000, but the company has written loans as large as £500,000.
The firm attracted a £20 million investment as part of the UK government’s Business Finance Partnership initiative in December, more than half of which has been lent since March.
Funding Circle might now be looking to partner with the banks but it remains highly critical of the product the industry has to offer. “This is not about big versus small, it is about fast versus slow,” says Meekings.
“This is why the Funding for Lending Scheme is misguided – the challenge is not the cost of finance, it is the speed of finance. It can take 15 to 20 weeks for a potential borrower to get an answer from the banks.
“It does not take 15 to 20 weeks to due diligence a business. The loan application bounces around and there is a feeling of helplessness by the client – even getting a ‘no’ quickly is better.”
He argues that the peer-to-peer model means anyone can lend and the process is quick. “Our main thesis for the lender is diversification,” says Meekings. “We are confident that the more diversified you are, the more certain your outcome.”
Funding Circle takes 12 days, which includes a seven-day auction period. The initial online application is reviewed within 48 hours. While this kind of speed is attractive to borrowers, it raises questions as to the rigour of the analytical process. The industry is too young to have reliable historical data on bad lending, but it will stand or fall on the quality of the loans it makes.
Meekings is all too aware of this. “Bad loans ticking up is the biggest risk we face,” he says.
“There are some very good businesses out there and some very bad businesses out there. This is not a savings account. This is an investment product. Bad debts are around 1.5% at the moment, which is in line with our expectations.
“We put borrowers into risk bands, but lenders set their own interest rates. They are in control and they take on the credit risk.”
However, given that individuals are not able to due diligence the borrowers themselves, they rely on Funding Circle’s screening process.
The firm has a proprietary model that is now in its third iteration. It uses the same information banks use: management accounts, cashflow and bank statements, together with information from public bureaus such as Experian and payment performance databases.
“We provide a preliminary screening using 3,000 different data points and are looking at layering new data on to this,” explains Meekings. This could, for example, include online reviews for restaurant businesses. Between 250 and 300 applications a month are approved.
“This is a technology play,” he emphasizes. “In banks they add staff – we are trying to truly use the internet in a way that banks haven’t. This means that we don’t have the same costs as a bank.”
Funding Circle has VC backing from Index Ventures and Union Square Ventures, and individual investors in the firm include Charles Dunstone, founder of Carphone Warehouse, Ed Wray, co-founder of Betfair, and Jon Moulton, managing partner of Better Capital.
Meekings is confident he is part of a secular change in lending to small businesses. “Once customers have changed, they won’t go back to the banks,” he claims. “There is a more efficient way of doing this.
“There is no reason why we can’t get to 20% of the market – the question is how long it takes.”
But it is betting that partnering up with the banks it has so criticized means it will get there sooner. “We think we can get there in a decade,” says Meekings. “We are trebling every year.”
