Funding Circle is set to celebrate its 10-year anniversary this August, having initially launched to support the small businesses that were underserved by high street banks following the financial crisis.
10 years on, small businesses are now facing another crisis of mammoth proportions, but Funding Circle is still poised to support them, as UK managing director Lisa Jacobs (pictured) explains.
“What’s amazed me and made me very humble is how much the whole team cares about small businesses and how that’s driven them to work hard during this period,” she tells Peer2Peer Finance News.
“When Covid-19 hit, we wanted to get involved with the government schemes and be able to distribute loans to small businesses through them, and the whole team came together – it was amazing to see.”
In April, Funding Circle was the first peer-to-peer lender to be accredited for the coronavirus business interruption loan scheme (CBILS), the government’s emergency support scheme for small businesses, that guarantees 80 per cent of the loan’s value.
The platform has purely focused on CBILS lending since then, and its approach appears to have been successful.
Earlier this month, it announced that it has facilitated a 16 per cent share of the CBILS market since participating. June was a record month for originations, which were up by approximately 30 per cent year-on-year.
“It’s been really great to see this resilience in small businesses and how they’ve adapted and changed – and how we’ve been able to support them,” Jacobs says, noting the number of repeat customers who come back to Funding Circle.
“I’ve been really proud of that and our ability to get funds to support businesses very quickly. We invested in our new technology platform over the past year and that’s really come into its own in this period.
“We’ve got instant decisioning for over 40 per cent of our applications, so businesses are getting a response very quickly and [if approved] they can get funds into their accounts within a week, which during this period is even more important.”
Funding Circle has also been approved to deliver the government’s 100 per cent guaranteed bounce back loan (BBL) scheme, which offers loans of up to £50,000 to micro businesses. Jacobs says that it is set to launch its BBL offering in the next few weeks.
However, the scheme has been met with more wariness than CBILS, amid concerns of fraud. Reports have claimed that some business owners are using the scheme to buy luxury items or pay off more expensive debt, as BBLs are interest-free for the first year and then carry a 2.5 per cent rate thereafter.
Jacobs is aware of these concerns but highlights that Funding Circle is only offering BBLs to existing borrowers, who have already gone through the platform’s credit assessment processes.
“It is challenging because of the way that the BBLs work,” she states. “There isn’t a credit assessment process; it’s very light touch, deliberately, so that the loans can get out to small businesses.
“When we launch BBLs we’ll be launching to our existing customer base, and for us it’s really about being able to provide to our existing customers with the range of lending products that they might require. We won’t be launching to new customers, which is where I think there is a higher risk on the fraud side.”
The government’s emergency loan schemes can only be funded by institutions, and Jacobs says that this is where Funding Circle’s diverse portfolio of investors comes into play.
“Over the past 10 years we’ve built lots of strong relationships with a number of different investors – retail investors, institutional investors, public entities – all who have lent through the platform,” she explains.
“We’ve re-engaged with our existing investors or investors who we were already in conversation with, so we’ve built on relationships that we’d had before. These are investors that have already done due diligence on our product to date and had been close to or were already lending through the platform.”
Jacobs notes that there are also new institutional investors that Funding Circle has not had a relationship with before, who are now expressing interest in funding its CBILS loans.
“What we’ve done over time is try to make small business lending accessible for a wide range of investors by performing the credit analysis ourselves, doing the servicing of loans,” Jacobs says.
“I don’t think the government scheme changes that. I think it continues to bring an asset class into the mainstream and enables investors to lend through it.
“What the government scheme does is it gives comfort around this uncertain environment and enables lenders to have confidence in lending.”
Of course, there is one group of investors that is not benefitting from CBILS – retail investors, who were the first type of investors to fund P2P loans when the sector came into existence.
“Our focus has always been on making sure that we can risk assess appropriately and deliver returns to our investor base, whether that’s retail or institutional investors,” Jacobs comments.
“Right now we’re focused on the CBILS loan products because we want to play our part and get loans to small businesses and we’ve put all of our attention there.”
Jacobs said that Funding Circle has had “really strong support from retail investors” over the years but does not specify when they will be able to invest through the platform again.
Ultimately, it will come down to an improvement in macro conditions, she explains.
“Given the constraints around retail investors not being able to lend through CBILS or BBLs we would have to feel very confident in the risk environment before we opened up to [them], she says. “I think if we’re in a stressed environment there will probably be government guarantee schemes, but if we’re in an improving environment the guarantees will probably go away.”
While there are “pockets” of risk-appropriate unsecured lending at the moment, Jacobs adds, Funding Circle is focusing on the most mainstream channel of getting funds to small businesses – the government schemes. As such, retail investors will need to wait for their invite back to Funding Circle.
“I think we’ve offered a product that retail investors have really liked in terms of returns that we’ve been able to deliver, while supporting small businesses,” Jacobs says.
“And it’s kind of where we started right? So I feel a strong affinity. I’m an investor through the platform, I think a lot of the people working at Funding Circle are, and are like, ‘come on, where am I going to put my money now?’
“I think there is a group of retail investors who really enjoy participating via the platform, and who’ve really enjoyed being part of Funding Circle. I would like to see a way in which we can bring them back and support them but we just need to make sure that’s done in a very risk appropriate way, and rewards them appropriately for the risk that they’re taking. That would be our focus for when we can bring them back.”
As for Jacobs herself, she’s keeping more of her money in cash at the moment, as “there’s quite a lot to play out in the market and I’m not sure which way it’s going to go”.
CBILS is set to finish at the end of September, but an extension is widely anticipated. Either way, Jacobs argues that there is a real case to create a longer-term guarantee scheme for small business lending to address the funding gap.
“There’s over 100 accredited CBILS lenders now; there is an opportunity to use that network to build something long lasting that will support small businesses for years to come,” Jacobs states.
“Historically we had the enterprise finance guarantee scheme and that was successful to a certain extent, but it wasn’t widely used, so we think there is an opportunity to expand that.
Read more: What’s happening at Funding Circle?
“We’re obviously trying to hedge our bets and look at both what would happen if the government scheme was extended or what would happen if there wasn’t an extension, so we can futureproof the business going forward.”
At the firm’s last full-year results, chief executive Samir Desai predicted that the group would be break even in the middle of 2020. Jacobs – understandably – remains tight-lipped on the London-listed company’s financials, only stating that there is a lot of uncertainty and that Funding Circle will give guidance in its half-year results in September.
However, Jacobs says that the “vast majority” of Funding Circle’s borrowers have continued repayments during the pandemic and those who needed breathing space have, on the whole, begun to resume repayments again, which must bode well for the future of the company.
Looking at the wider economy, Jacobs believes that the government has done a “remarkable job” of supporting small businesses and thinks that it is these small firms that will drive the UK’s recovery.
“I think there’s been a resurgence in how the community feels about small businesses,” she says. “We did a survey a few weeks ago and 80 per cent of people have shopped more in small businesses over this period, and 90 per cent think they will do more so, going forward.
“So there’s a big public wave behind them and they are a massively important part of the economy. 55 per cent of borrowers we surveyed about a month ago are expecting to access finance within the next six months, so that might be for the recovery or it might be to support with the changes that they need to make them Covid ready, such as putting up Perspex screens and investing in their online retailing.
“We’re seeing businesses who took a BBL loan looking to refinance it to grow. I think we’ll see more of that going forward and that there will be more small business demand for lending.”
So small businesses will drive the recovery, and Funding Circle will support them while they do it – less than a year in the MD role, Jacobs seems best placed to steer the helm of the UK business out of the economic crisis.