If you’re a small business owner from the UK or the USA, or an investor looking at alternative investments, you must have heard about Funding Circle, one of the world’s most famous Peer to Peer lending websites, which has lent just over 1bn British Pounds up to date.
What Funding Circle does, basically, is pretty simple, and at the same time ingenious. It connects between investors who are willing to invest directly into businesses, and business which are looking to save the overheads associated with bank business loans.
They are able to do so efficiently, and there are many positive reviews to attest for that. While businesses are glad to be accepted for lending within a week, investors are also happy to find profitable investment venues (with an average annual return of 7.0%) amid a low-interest rate period.
What’s the key behind Funding Circle’s success?
- Harnessing the Peer to Peer concept – taken from domain of computing , there, it is to describe the architecture behind things like sharing file storage or cryptocurrencies. Funding Circle “borrowed it” in order to apply it to the Fintech world.
Though it’s difficult to say Funding Circle’s system is indeed what you would refer to as a Peer to Peer system in the traditional sense of the word, one of its ideas – direct bilingual transactions – is definitely embedded in it.
- Mistake-free credit assessment – the core of every credit business is risk assessment. If you do it better than your competitors, you would know how to minimize your default rates, while offering financial-adequate individuals (and business, in this case) access to cheaper financing.
Funding Circle do it better. With less than 2.5% loans being defaulted, while offering attractive terms for most businesses, Funding Circle are proving year-by-year that they can recognize which businesses are healthy and worth financing, and which simply aren’t.
- Unlimited money to lend – The accurate credit assessment doesn’t only make Funding Circle a good platform to borrow money from, it also makes it a great way to invest outside the realm of stocks, bonds, mutual funds and ETF’s.
With a mega-low default rate, and high return, more and more individuals and business are happy to invest their funds as lenders. Even the British government is investing hundreds of millions of funds directly into this platform, to enjoy both the benefits on both hands – helping the small business economy, while earning high interest rates. A win-win.
- Smart approach – Although Funding Circle could have easily sunk its teeth into the mega-volumes transacted through its sytem in order to make quick profit, they chose a fair pricing model where they take a fixed rate of 1% of all transactions. This helps newcomers understand how things work quickly and efficiently, and moreover – establish trust in the platform. At their current stage considering the fact they have already raised hundreds of millions of dollars, they better focus on user experience and branding rather than improving profitabilty.
- Design expertise – people who go to Funding Circle are automatically withdrawn into the concept. Unlike other Fintech startups that try to immediate banks with their design, Funding Circle wants the design to be as friendly and welcoming as can possibly be, and it works.
Investors would be excited by the great returns promised to them on the website, alongside the low default rate and what appears to be a very low risk, all in all. They would also surely appreciate the straightforward, transparent, approach taken by Funding Circle that provides all the necessary data and statistics of its platform.
Businesses are promised a quick and easy appliance process, which is just what they were looking for. Most businesses which are used to banks expect a cumbersome, and even somewhat hellish, experience just to get a quotation; When they hear about process which is mainly automatic and doesn’t require sending in business plans or any of the like, they are happy to register to snoop around and see if the Funding Circle platform is right for them.
Funding Circle is currently expanding to other European territories, and have already expanded into the USA over 2015. We predict or at least hope that in a matter of years, financing will become much easier also on less developed parts of the world, and enable struggling economies to get back on their feet via direct investment in their small business sector.