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Funding Circle Raises $37 Million and Launches in The U.S.

by Peter Renton on October 23, 2013

Funding Circle logo

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.

{ 13 comments… read them below or add one }

Shane @ Beating Broke October 23, 2013 at 7:32 pm

I think that SMB loans could offer a pretty nice upside for some lenders that are already taking advantage of the p2p lending realm. A little more diversification, maybe a bit more stability (although I don’t know the stats on that), and a larger scope of investment opportunities.

Do you know if they’ll have the same restrictions for borrowing companies and lending investors in the states as the p2ps do? e.g. can I invest from North Dakota?

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Peter Renton October 24, 2013 at 6:37 am

Thanks Shane. Good to hear from you again. I think you hit the nail on the head when you mentioned diversification. That is what this move does for investors, it provides more diversification across the p2p lending space.

And right now, Funding Circle USA will be available to investors in all 50 states but accredited investors only. Non accredited investors will have to wait a while before they are eligible to invest.

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Glenn October 23, 2013 at 9:06 pm

This is very big news! Extremely keen to continue watching how SMB lending unfolds in the US from a P2B perspective.

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Peter Renton October 24, 2013 at 6:38 am

Thank Glenn. Yes, indeed, the p2b lending space just got a lot more interesting.

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Dan B October 24, 2013 at 12:51 pm

Hmm, let me think. $1000 a note. Yeah, I’m a little strapped right now, but if I sell my 10 year old M3, I might be able to swing it. Ok, yeah put me down tentatively for 13 notes…………….possibly 14 if, I cut out white mocha espressos for the next 2 years.

Actually I really do want to keep my car (& my white mochas) so I guess it’s just as well that this is for the big fish accredited investors anyway. So I’ll have to pass on this.

But yeah, this is big news for the individual investor. So are you planning on 400-500 notes, so that you’re sufficiently diversified & all? :)

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Peter Renton October 24, 2013 at 3:26 pm

I agree it is a shame that they are completely ignoring non-accredited investors. But I am planning on creating a diversified portfolio on Funding Circle USA although it will be way less than 400 notes. I think you can have a lot fewer notes because of the low expected loss rate – they are targeting under 1% so I think 100 notes would be sufficient.

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Dan B October 24, 2013 at 6:27 pm

I agree that 100 would be more than sufficient……………..if they actually achieve the under 1% number.

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Greg October 24, 2013 at 7:59 pm

Thanks for the updates Peter. Definitely great to have another player in the P2 lending space. Again, too bad about the accredit investor restriction, maybe in a future conversation you could see if they have any plans to expand that?

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Peter Renton October 30, 2013 at 5:36 am

Hi Greg, They have said repeatedly that allowing non-accredited investors on their platform is not in their short term plans but long term (I guessing 3+ years) they would like to make this investment available to everyone.

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Steve October 25, 2013 at 12:23 pm

Do you know how they underwrite the business loans? Is it based on personal credit scores; time in business, financials,…? is there an educational website?

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Peter Renton October 30, 2013 at 5:34 am

Hi Steve, Funding Circle USA says that they gather data from a number of different sources and they look at personal credit history of the owners as well as business data such as financials, time in business and other alternative data. I will be going into their underwriting in much more detail when they launch their marketplace for investors.

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Emma October 30, 2013 at 12:02 am

Hi Peter,

I’m new to p2p investing & want to thank you for sharing so much of your knowledge & wisdom thru this site.
Re: p2b lending, how would one evaluate the loans? Like Steve, I was wondering if the borrower’s credit score is a factor (although having a good credit score says nothing about how good the proposed business is). Of course, if the expected loss rate is around 1%, they must have a proven formula. I would imagine much lower returns for lower lever of risk.

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Peter Renton October 30, 2013 at 5:32 am

Hi Emma, Thanks for chiming in. With Lending Club and Prosper investors have a great deal of history to use to do our own analysis. With p2b lending with Funding Circle there is limited history. And right now there is no data available to analyze. But when they open a true marketplace for investors (should be in January) I imagine this will change. I will be writing more about investing when this marketplace opens.

As to your comment on returns, one of the reasons I like p2b lending models like Funding Circle is that I believe returns will be just as good as with consumer lending but with a lower level of risk. At Funding Circle USA these are secured loans backed by the assets of the business and a personal guarantee from the business owners.

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