I spoke with Sam Hodges, CEO of Funding Circle USA about the success of Funding Circle and his perspective on how this business model is an alternative to small business lending.
Sam made his debut after being rejected from Banks for 96and time trying to get a franchise loan. Although they had an excellent financial profile and were willing to provide personal guarantees, they spoke to 96 lenders and were unable to secure a loan. An opportunity arose from this problem. Sam thinks there is a systematic gap between what a small business owner can put on their credit card (up to 25,000) and where banks want to start lending (500,000 and more for installment loans ).
Sam, how does it differentiate you from Factors and other small business lenders?
We provide short term loans to preferred and super preferred borrowers. Our average clients have revenues of $1.5-2 million, have been around for four to fifteen years, and are profitable. About 20% of our book is for franchisees. Our businesses use loans for expansion purposes.
We are in the US and UK, and we expect to generate $600 million in 2014. We are growing rapidly and are excited to change the way small businesses 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 entirely proprietary. We take responsibility for systems security and, by extension, investor and borrower details. We use the best procedures for password protection and user information.
How do you monitor borrower credit quality?
We are able to link small business financial data to a company’s tax return. Our underwriting is much more complex given that our installment loans range from three to five years in the United States. In short, we produce our own internal Funding Circle score which determines the expected default loss per term. We then take this matrix and determine the prices. We have provided a default loss for each of our credit ratings.
What are regulators saying about P2P lending?
Regulation is an important element. There are regulations on both sides. On the borrower side, we must comply with federal and state lending laws regarding disclosure, pricing, and how we structure and manage the loan product. We are operational in 36 states in the United States.
With investors, this is a new idea of building capital online. Federal security laws have not provided for investment in this space. We conducted a very detailed review of existing federal laws regarding securities offerings and ensured that the way we offer loans to investors is compliant.
Do you have different investment options for investors?
Yes, investors can buy whole loans, chunks of loans, or chunks of funds that diversify between many loans.
Can any individual become an investor?
For regulatory reasons we do not have a large scale retail product, but for accredited investors you can register and invest.
Are you going to disintermediate the banks here?
Banks have a structural incentive not to provide small installment loans to businesses. We believe that over the next few years, forward-thinking banks will begin to see Funding Circle as a great partner to help them serve small businesses that they currently cannot offer credit to.
Thanks Sam, that was very informative.
ps Funding Circle and Santander have just announced a partnership relationship in the UK, Santander will direct customers to Funding Circle via a direct link on its website.