P2P lending platform fills gap for Small Business Installment loans


I spoke with Sam Hodges, CEO of Funding Circle USA about the success Funding Circle is having and his views on how this business model is an alternative to small business lending.

Sam got his start after being rejected from banks for the 96th time trying to get a franchise loan. Even though they had a great financial profile and were willing to provide personal guarantees, they talked to 96 lenders and could not get a loan. An opportunity was borne out of this problem. Sam believes there is a systematic gap between what a small business owner can put on credit card (up to 25K) and where banks want to start lending (500K on up for installment loans).

Sam, how do you differ from Factors, and other lenders to small business?

We do short term lending to prime and super prime borrowers. Our average clients are $1.5 to $2 million in revenues, have been in existence from four to fifteen years, and are profitable. About 20% of our book is to franchisees. Our businesses are using loans for expansion purposes.

We are in the U.S. and U.K., and are tracked to do $600 million in origination in 2014. We are growing quickly and are excited about changing the way small business can access capital.

Do you own the platform?

Yes, we built and own the code. Many aspects of our platform are hosted elsewhere, but our credit stack is completely proprietary. We take responsibility for systems security, and by extension, both investor and borrower details. We use best of breed procedures on password protection and user information.

How do you control for credit quality of the borrower?

We are able to tie small business financials back to a company’s tax return. Our underwriting is much more complex given our installment loans go from three to five years in the U.S. In short we produce our own internal Funding Circle score which determines expected default loss by term.   We than take this matrix and determine pricing. We have expected default loss for each of our credit grades.

What do the Regulators say about P2P lending?

Regulation is an important piece. There is regulation on both sides. On the borrower side, we have to comply with State and Federal lending laws around disclosure, pricing, and how we structure and service the loan product. We are up and operating in 36 states in the USA.

With investors, this is a newer idea of forming capital online. Federal security laws have not anticipated investment in this space. We did a very detailed review of existing Federal statutes around securities offerings and made sure the way we offer loans to investors are compliant.

Do you have different investment options for investors?

Yes, Investors can buy whole loans, pieces of loans, or pieces of funds that diversify across many loans.

Can any individual become an investor?

For regulatory reason we do not have a broad based retail product, but for Accredited Investors, you can sign up and invest.

Will you disintermediate the banks here?

Banks have a structural incentive not to do small installment loans to businesses. We think that over the next several years forward-thinking banks will start to view Funding Circle as a great partner to help them serve small businesses they can't currently offer credit to.

Thank you Sam, that has been quite informative.

p.s. Funding Circle and Santander just announced a partnering relationship in the U.K., Santander will refer customers to Funding Circle through a direct link on their website.

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