Your money-making expert. Financial journalist, TV and radio personality.
The banks aren’t in anyone’s good books at the moment. Small businesses are crying out for credit, but the banks aren’t lending. Meanwhile savers are receiving miserable rates on their deposits.
So why not bring small businesses and savers together – so businesses can get reasonable loans, and savers can get decent interest rates?
That’s what new company Funding Circle is doing, securing a better deal for both businesses and savers by cutting out the banks altogether. It’s surprising it hasn’t happened sooner.
So-called ‘peer-to-peer’ lending isn’t a new concept – websites like Zopa have linked up individual savers with individual borrowers for a while now with great success – but Funding Circle is the first company to bring small businesses into the equation.
This creates an exciting investment opportunity for savers, offering real rewards for comparatively little risk.
It’s good for savers… who can earn up to 9% on the cash that they invest (a far greater return than the paltry rates offered by the banks).
It’s good for businesses… they get the investment they need quicker and cheaper than they do from banks (paying between 8% and 11% on loans).
It means higher returns for lenders, and lower rates for borrowers.
In short, it’s a win-win situation.
Funding Circle allows you to lend anything from £20 to £2,000 to each business, for a period of one or three years. (There is no limit on how much you can lend in total.)
The idea is to divide your investment into small instalments between lots of different companies to spread the risk. You effectively “sell” your money in an online marketplace.
The companies you lend to then pay you a fixed amount each month, which includes interest and a repayment amount.
You can choose which businesses to loan your money to – each company has their own profile page on Funding Circle, containing all its basic information (such as how long it’s been trading for, its credit rating, and the nature of its business). So if you want to only lend to companies in one particular sector, you are free to do so.
You can also choose how much you want to lend to each business and at what rate of interest.
Alternatively, you can use the quick and easy “Autobid” function. With this, you simply enter the basic loan parameters (such as the minimum rate of interest you require) and the site will automatically lend out your money to businesses that fit your chosen criteria. It’s a hassle-free option, which automatically spreads the risk by lending to a number of different companies.
It’s certainly true that investing in small businesses can be risky – many do go bust.
However, investing through Funding Circle is a much more solid bet, for two main reasons:
a) The strict vetting process
To begin with, each business has to fulfil strict criteria before they are even allowed to join Funding Circle.
Each company is not only subject to a full independent credit-check, but undergoes a thorough review by professional underwriters as well. Every business on the site has been established for a minimum of two years (though the average is around 30 years) and undergone extensive checks on their profitability and balance sheet.
All the accepted companies are then placed into one of three risk categories: A+, A or B. You can specify which category you want to lend to. (Obviously, “B” rated companies tend to pay more interest than “A+” ones, to make up for the increased likelihood of any bad debts.)
b) The risks are spread
Because your money is spread across many borrowers, in the event that one company folds the cost is spread around – so there’s a minimum impact on lenders.
The current projected default rates (the level of bad debts) are as follows: 0.6% for A+ businesses; 1.5% for A-rated firms; and 2.3% for B-rated companies.
Therefore if you were lending money to a B-rated firm at a rate of 9%, the likelihood is that you would get around 6.7%, after defaults have been taken into account.
That’s still pretty good going though – and head and shoulders above what the banks are offering.
Clearly, putting money into Funding Circle is not the same as putting money into a high street bank. You wouldn’t want to put your entire life savings into it (for one thing, it isn’t covered by the Financial Services Compensation Scheme). You do run the risk of some bad debts – but it’s controlled risk, outweighed by the benefits (such as the overall higher interest rates) on offer.
As one avenue for your investments – with returns of between 6%-9% – Funding Circle is a tempting option for savvy savers and investors.
There are three key things that we think make Funding Circle stand out as a great investment opportunity:
1. The decent returns on offer
Investors lending through Funding Circle have benefited from an average 8.3% return a year – far better than even long-term saving bonds (you can only expect around 4.5% from current five year bonds, if you’re lucky) and the pitiful rates of 1% or thereabouts for current accounts.
2. Easy access to your money
Another key advantage to Funding Circle as an investment opportunity is that it allows you to access your funds when you need them.
Other social lending sites such as Zopa now offer this option too. However (unlike Funding Circle) not all savers are able to get instant access to their funds. If your loan with Zopa has suffered a missed payment, for example, you won’t be able to access your money until the end of the originally specified loan period.
So at present, Funding Circle is one of the most flexible investment sites out there – and it’s handy “Autosale” tool lets you sell part or all of your loan onto other lenders quickly and easily.
This isn’t hard to do and is attractive to other potential lenders, as when you buy a loan part you begin earning interest on it straight away.
3. You’re investing in something worthwhile
Instead of piling more profits into banks’ coffers, you are helping small businesses grow.
Let’s face it – many banks invest in things that are far from ethical, putting our money into everything from the arms trade to companies working in countries with lax child labour laws.
With Funding Circle, you can not only get better rates – you can sleep at night knowing that your money is actually doing good, helping the British economy and creating jobs, investment and opportunity.