Funding Circle, an online marketplace that connects small businesses looking for loans with individuals and institutions willing to lend money, has picked up a significant round of funding of its own. The startup, founded in 2009 in London and more recently active in the U.S., has raised $65 million — money that co-founder and CEO Samir Desai tells me it will use to continue to improve its technology, as well as build out further into the U.S. and new markets, likely via acquisitions of other, regional online lending platforms.
The $65 million round getting announced today is Funding Circle’s biggest to-date and puts the total raised by the company at $123 million. It’s a Series D round and was led by Index Ventures, with participation from other existing investors, Accel Partners, Union Square Ventures and Ribbit Capital.
Why so much, and only nine months after its last, $37-million, round? “It’s a testament to the market opportunity,” Desai says. “It’s a very, very fast-growing business.” The UK business, he tells me, has been growing at 150% a year over the past four years, with the current rate of loans accelerating rapidly. Of the more than £350 million ($600 million) loan in that time, nearly £150 million was loaned out this year.
In the U.S. the business has been seeing similarly high rates of growth. Whereas Funding Circle started out 2014 lending out $300,000 per month in the U.S., in June it passed $6.5 million/month.
In total, Funding Circle is forecasting that it will loan out $600 million in 2014.
The idea behind Funding Circle is that it targets small businesses — “not startups,” Desai notes pointedly, and “not desperate businesses, just good, solid operations” that might be restaurants, pharmacies or small manufacturing firms. A typical turnover for a typical business on its platform is between $1 million and $2 million.
Funding Circle may provide interest rates similar to banks — “sometimes it’s cheaper, sometimes it’s more expensive,” Desai says simply — it does it on a vastly more efficient basis. Like other online lending platforms like Kabbage, Lending Club, and Fundera, Funding Circle has created a platform that relies heavily on technology to help make more intelligent lending decisions.
Funding Circle’s twist is that it assigns a human expert to vet each loan. Desai says that so far the formula has been working well. The company targets a loss rate of 2.3% per year, “but on average we’re seeing a loss rate of 1.8% per year.” And, in terms of the net returns, 70% of investors are seeing net returns of between 6% and 10% each year and in the U.S. above 10%.
Desai adds that even with that more analogue approach, a typical loan is turned around in a week, or faster if necessary. (A bank, in contrast, can take 15-20 weeks on average to process a loan application.)
Part of the company’s growth up to now has had to do with the platform gaining popularity and a higher profile — “small businesses are massively underserved by the current markets and banks,” Desai says — but part of it is also because of the investors stepping up to loan money.
There are a large amount of high net-worth individuals who are tapping into the marketplace — which Desai describes as “the stock exchange or eBay for small business loans — but now there are also a growing number of institutions as well, such as the UK government-backed British Business Bank, which in March of this year added £40 million to Funding Circle’s lending coffers.
Even with the hundreds of millions of dollars already passing through its platform, and a number of other players also looking to disrupt the same space, Desai believes that it will be some time before the space feels crowded.
“In the UK there is about $10 billion lent each month to small businesses, and in the U.S. it’s five times as much, so as though we are growing it’s still just a fraction of the market,” he says. Any competition, in other words, is good competition for now. “There is plenty of cake for all of us.”
While companies like Kabbage have tapped the finance markets to raise massive credit facilities to finance their loans, Desai says that Funding Circle will “remain committed” to its peer-to-peer marketplace model. “It’s just a more efficient model.”
The company is not profitable yet, as it continues to reinvest to expand.
Along with this round, Robert Steel, the CEO of Perella Weinberg Partners and former Under Secretary for Domestic Finance of the United States Treasury, is joining the Funding Circle board. The move is a smart one, as it adds both banking and regulatory clout to the operation, essential as it continues to grow.
“I have been impressed with the growth of the company over the past four years, and believe there is a unique opportunity for marketplace lending to revolutionize access to finance for small businesses across the globe,” Steel said in a statement. “I hope my experience as CEO of one of America’s largest banks, and my time in the US Treasury department, will support the company as we enter the next stage of our growth.”
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