I spoke with Sam Hodges, CEO of Funding Circle USA, about the success of Funding Circle and his take on how this business model is an alternative to small business loans.
Sam got his start after being kicked out of banks for 96e time trying to get a franchise loan. Even though they had an excellent financial profile and were ready to provide personal guarantees, they spoke to 96 lenders and were unable to get a loan. An opportunity arose out of this problem. Sam thinks there is a systematic gap between what a small business owner can put on a credit card (up to 25K) and where banks want to start lending (500K for installment loans).
Sam, how are you different from Factors and other small business lenders?
We provide short term loans to prime and super prime borrowers. Our average clients have sales of $ 1.5 million to $ 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.
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.
Are you the platform owner?
Yes, we built and owned the code. Many aspects of our platform are hosted elsewhere, but our credit stack is fully proprietary. We take responsibility for the security of the systems and by extension the investor and borrower details. We use the best practices in password protection and user information.
How do you monitor the credit quality of the borrower?
We are able to link small business financial data to a business tax return. Our underwriting is much more complex as 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 default expected loss per term. We then take this matrix and determine the prices. We expect a default loss on each of our credit scores.
What do regulators say about P2P lending?
Regulation is an important element. There is regulation on both sides. On the borrower side, we must comply with federal and state loan laws regarding disclosure, pricing, and how we structure and manage the loan product. We are established and operate in 36 states in the United States.
With investors, this is a newer idea of online capital building. Federal security laws have made no provision for investment in this space. We have done a very detailed review of existing federal securities offering laws and made sure that the way we provide loans to investors is compliant.
Do you have different investment options for investors?
Yes, investors can buy whole loans, chunks of loans, or funds that diversify into many loans.
Can any individual become an investor?
For regulatory reasons, we do not have a broad-based 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 view Funding Circle as an excellent partner to help them serve small businesses that they currently cannot offer credit to.
Thanks Sam, this is very informative.
ps Funding Circle and Santander have just announced a partnership relationship in the United Kingdom, Santander will direct clients to Funding Circle via a direct link on their website.