CFI: Alternative finance
New breed of lenders is gaining ground by Laura
McMullen, business
development manager, Funding Circle
Bank lending to small busi- nesses has been the hot topic in the press over the last five years. Net lending has de- clined steadily since 2008, according to the Bank of England and, despite Govern- ment intervention and the in- troductions of schemes such as Funding for Lending, the banks have been unable to re- verse this decline. As a result, a lending im-
passe has emerged. Te banks claim they want to lend but there is a lack of demand; while small business own- ers cry out for more support to help access much-needed credit.
“Innovative providers, with technology at their core, are providing alternative ways for businesses to access finance” Until recently this impasse
showed no sign of abating but the emergence of new and in- novative providers, with tech- nology at their core, is provid- ing alternative ways for small businesses to access finance. Tese new forms of finance
eliminate the complexity and lethargy of banks by remov- ing them entirely, directly connecting individuals who are looking to earn a better
www.mortgageintroducer.com
return on their money, with businesses requiring finance to support their growth. And, when you consider that the Government has warned of an emerging small business funding gap of £29-£59bn in the future, there is the poten- tial for these new financial providers to revolutionise the industry and replace the need for banks permanently.
New breed At Funding Circle, we are one of these new breeds of business. We help exciting, growing businesses to access finance quickly and efficient- ly.
To obtain a loan through
Funding Circle, a business first completes an initial on- line application form, which takes approximately 30 min- utes. Tis can be completed at any time and isn’t fixed to the typical 9am-5pm window that exists with banks. On average 45% of all initial loan applica- tions are completed outside of bank working hours. If suc- cessful with the initial appli- cation, Funding Circle’s credit assessment team then review every application and contact the business at a convenient time to discuss its loan needs. To be accepted on to the
marketplace, businesses must be a limited company, have at least two years’ worth of ac- counts posted with Compa- nies House and a strong cred- it rating score. Loan values range from £5,000 - £500,000 and businesses can take out asset finance if there is a spe- cific asset they are looking to purchase. Te length of loans is either one, three or five years. Because people are lending
“Banks acting as middleman may become surplus in the supply chain”
money directly to businesses, there are no bank spreads, so businesses and investors get a better deal. On average a business
borrowing money
through Funding Circle pays a rate of 8.6% in interest. And crucially
the whole
process is faster, simpler and a more efficient experience than currently exists: on aver- age businesses gain access to finance in just 12 days.
Crowdfunding And Funding Circle is not alone either. Other new play- ers are using crowdfunding mechanisms to help business- es obtain finance, in return for equity; while invoice fi- nance companies are helping to eradicate the issue of late payments by enabling small businesses to auction off their invoices and free up cash flow. Te flexibility and speed
used by these new providers is something the banks simply can’t compete with. Where they are rigid, process-heavy, slow and unresponsive to the needs of 21st century busi- nesses, we all focus on swiſt- ness, efficiency and simplicity. By removing the blockages, finance can flow more freely.
Learning curve Although the sector is still very much in its infancy, it is encouraging to see there are already some notable advo- cates. Andy Haldane, execu-
tive director of the Bank of England, suggested in March that these new forms of fi- nance could eventually re- place high street banks. He explained that banks acting as middleman may become surplus in the supply chain if borrowers and investors can now be connected directly. Te government has also
recognised the impact this sector could have, and has committed to channeling £100m
through non-bank
channels over the next year to help increase the level of funding available to busi- nesses. Of course, new forms of finance will need to expand considerably to help provide the kind of funding that will make it a real competitor to the banks, but the starting framework is in place to make it happen.
Self-regulation As the industry grows, it will face new challenges. Tere- fore it is important that ap- propriate measures are in place to ensure borrowers feel confident that providers are offering a transparent, fair, robust and orderly operation. Funding Circle and the other significant businesses in the sector have formed a self- regulatory body (P2PFA) to ensure borrowers and advis- ers feel confident about the veracity of these new provid- ers. Encouragingly the P2PFA has already been recognised by the government as the first step towards full regulation. Te future is very excit-
ing. For the first time in gen- erations, business owners and their advisers now have real choice about how to achieve finance.
MORTGAGE INTRODUCER OCTOBER 2012 45
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