The nascent peer to business (p2b) lending space received a tremendous boost today. Funding Circle, based in the United Kingdom, announced that they are entering the US market by joining forces with Endurance Lending Network, who will become Funding Circle USA.
That in itself is very big news. But even bigger news is that Funding Circle has raised a new funding round to the tune of $37 million from some big name VC firms. Leading this Series C round is Accel Partners (an investor in Prosper). Others joining the round are a fin-tech specialist VC fund, Ribbit Capital, and existing Funding Circle investors, Union Square Ventures (also an investor in Lending Club) and Index Ventures. The vast majority of this $37 million will be dedicated to the US operation. For the first time this country will have a very well funded p2b lending platform.
I profiled Endurance Lending Network back in August and was very impressed with their operation. They had strong underwriting, evidenced by the fact that 100% of their loan book is current. I confirmed with Endurance earlier this week that their portfolio is still 100% current.
Even though their track record is short (most loans have been issued this year), Endurance still caught the attention of Funding Circle Co-Founder and CEO Samir Desai. In our conversation yesterday he said that they had spoken to pretty much every startup p2b lender in the US and that after conducting their due diligence it was very clear that Endurance was the best platform.
“In the end,” said Desai, “it was a very easy decision. Endurance was head and shoulders above everyone else in the space. They had taken a similar conservative approach to their underwriting as Funding Circle and both sides could see that joining forces made sense.”
Funding Circle – the World Leaders in P2B Lending
In the UK Funding Circle has issued £165 million (around $266 million) in business loans since they began in 2010 and are currently issuing £14 million ($23 million) a month. The loan sizes range from £5,000 to £1 million although most fall at the lower end of the spectrum – the average is £65,000. They are the clear leader in p2b lending in the UK, and probably the world, but this moves marks their first international expansion.
One interesting fact that many readers may not know. In March the UK government began lending £20 million on Funding Circle as a way to try and boost small business lending. Since then the government has taken 20% of every loan issued by Funding Circle. This has been a huge brand builder for the company and has led to a large amount of press coverage.
Like most UK p2p lenders, interest rates are much lower than what we are accustomed to here in the US. When I asked Desai about this difference, he said that he understands that US investors have higher expectations but they still expect to maintain very low default rates here, just like they do in the UK.
Endurance Lending Network Becomes Funding Circle USA
I also chatted with Alex Tonelli, co-founder of Endurance, earlier this week and he said both he and his co-founder Sam Hodges were very excited about this deal. Since they first started talking with Funding Circle in the spring, they felt this deal made sense.
“We are on their trajectory and growth path, they are just three years ahead of us,” said Tonelli. “We have taken the same steps as they did in their early stages. We will operate as a subsidiary and leverage their experience and resources; we get the best of both worlds.”
All of Endurance’s 16 staff members are staying on and they will be growing that number aggressively with the expectation they will be at 60 people by the end of next year. Tonelli would not share their current loan volume although he did say that information was about to be published broadly, which is a continuation of the transparency Funding Circle has shown in the UK. Additionally, he said they have recently received greater than $40 million in capital commitments and plan to deploy that quickly.
An Investor Marketplace
Currently, there is no true investor marketplace for p2b loans and very little online loan origination in the 3- 5 years term length category. Funding Circle USA will launch the first p2b marketplace by the end of the year for accredited investors only. Allowing non-accredited investors is in their medium-to-long term plans but not initially.
There will be a whole loan and fractional loan platform although the investor minimums will be relatively high on the fractional platform. The minimum has not been set yet but it is expected to be around $1,000 per loan. Investors will be able to manually choose loans or use an auto-invest feature.
I will have more details on their investor marketplace as soon as it launches.
What About Lending Club?
Tonelli and Desai are acutely aware of Lending Club’s coming entrance into the US small business lending market. Both told me they welcome Lending Club and felt that it would be good for the market overall. Desai said he has a very good relationship with Renaud Laplanche, CEO of Lending Club, and they have spoken about Funding Circle’s expansion here.
We don’t know the exact details yet of Lending Club’s plans. Both Tonelli and Desai think their offering could end up being complementary and not necessarily competitive to Funding Circle USA. Even if Funding Circle USA and Lending Club’s offering end up looking very similar the market is probably large enough to hold both firms as well as a few more.
“Regardless of what Lending Club does,” said Desai, “the real competition is coming from the banks. They continue to dominate small business lending in the US.”
My Thoughts on This Deal
I first spoke with Desai back in November last year when he wanted to chat generally about the US market. At the time I said that the p2b market in the US is wide open with no established player. That officially ends today with the launch of Funding Circle USA.
I see this news as one of the biggest stories of the year in this space. Funding Circle has an exemplary track record and a well established brand. They have instantly changed the online lending landscape here and given p2b lending a much needed boost. I will even go as far as to say I now expect in the next few years p2b lending to grow faster than what consumer p2p lending has done.
As an investor I am very excited about this deal. I want more investing options and Funding Circle USA now provides us with a well-funded, established player. I am looking forward to becoming an investor.
What do you think? Are small business loans on your radar? As always I am interested to hear your comments.