Funding Circle, a Kickstarter for SMBs, Picks Up $16M From Index, Union Square Ventures

Some great news for small business owners, and perhaps a sign of more crowdsourced funding coming to the U.S.: the UK-based Funding Circle — a kind of Kickstarter for lending to smaller enterprises — has just announced that it has raised a $16 million round to further build up its business of enabling non-bank lending to small enterprises.

The investment included participation from existing investor Index Ventures as well as new investor Union Square Ventures — a sign of how Funding Circle may have its sights set on taking advantage of new crowdfunding laws and expanding to the U.S. This Series B round takes the total raised by Funding Circle to $21 million.

Funding Circle has made some impressive strides since launching in the UK 18 months ago: it’s facilitated lending to 670 small businesses in the UK, with funds totaling £28 million ($45 million), representing annual growth of over 400 percent. More than 10,000 people have registered on the site to date; the company claims “inflation-beating average yields of 8.4 percent” for investors.

Funding Circle says it is collectively currently lending £1 million ($1.6 million) to small businesses per week through its site.

The startup is a sign of the times not only in its crowdsourced, P2P roots, but also in the fact that it is aimed at bypassing banks, the subject of so much criticism for their practices over the last several years — the thinking goes: why give them the benefit of making money off of lending when you can find others to do that instead?

And there is something decidedly more efficient-sounding about Funding Circle compared to banks: whereas it can take months to finalize a bank loan and get the money flowing, Funding Circle claims that a deal can be secured and funded through its site within days.

There is also a big opportunity there to take some business away from the banks:  Funding Circle notes that currently some 90 percent of small business lending in the UK still goes through the traditional bank channel.

There is some state impetus behind Funding Circle in the UK that is somewhat similar to what we’ve been seeing in the U.S. Whereas the Senate in Washington has been trying to make it easier for crowdfunding to become a more legitimate way of kick-starting small business enterprises, in the UK the government has also proposed a plan in its most recent Budget to create facilities to lend £100 million ($160 million) through “non-bank channels.”

Funding Circle has not said whether it plans to take its business outside of the UK at this point, but the fact that they’ve signed on USV — which funds Kickstarter, among others — as a backer is a strong vote of confidence that this project may try to grow beyond its current borders.

For now, Funding Circle is saying that the capital from this round “will be used to continue to innovate around Funding Circle’s service, increase marketing presence and drive recruitment.” The company wants to double headcount in the next year.

Interestingly, Funding Circle has chosen to keep any references to Kickstarter completely out of its own statements on the new round of investment:

“This deal represents the next step in the growth of Funding Circle and will help us to create a lasting alternative to banks for small business loans. Index has been a prominent supporter and advocate of what the business is trying to achieve, and we are delighted to continue our partnership together. We are also excited to welcome Union Square Ventures as co-investors. They bring with them a wealth of expertise and experience having worked with some of the most recognisable technology businesses in the world, including Twitter, Zynga and Foursquare,” Samir Desai, co-founder of Funding Circle, said in a statement.

Another co-founder, James Meekings, meanwhile, says that the UK small business lending market is currently worth about £70 billion in total. “I don’t see a reason why we couldn’t eventually get to a stage where we had about 10% of that market,” he told the Sunday Times (behind paywall).

Funding Circle offers a couple of basic models to would-be users of the service, taking a £1,200 transaction fee in the process: one person can fund many different projects; and one business can borrow from several people based on what interest rates people are offering in an auction/bidding process. The loans can cover working capital, expansion capital, asset finance and one-off business expenses and range in value from £5,000 to £250,000.

“We believe this approach of financing businesses – away from banks and towards a marketplace model – is powerful and more beneficial to all participants,” Andy Weissman, partner at Union Square Investment, added in the statement.

Other participants in this most recent round included existing angel investors Jon Moulton (founder of Better Capital), Edward Wray (co-founder of Betfair) and Charles Dunstone (founder of The Carphone Warehouse).