On Internet Business

FundingCircle.com

Posted by Michael under Business Growth

There’s a new source of funding available to small businesses in the UK. With the backing of some high profile private investors, who include the present and former heads of private equity firms, insurers, banks, IT companies and leading professional services providers. FundingCircle.com aims to help entrepreneurial businesses sidestep the high charges and slow response of major banks.

HM Treasury says that 92% of small business lending is concentrated in the hands of the ‘big four’ banks, which means that many businesses have limited options for finance because they can’t make themselves attractive either to the banks or to bond markets which focus on larger organisations.

Small businesses employ more than half the workforce

Yet those smaller firms employ 60% of those who work in the private sector and create 50% of the UK’s gross domestic product, so anything that strangles their growth also causes the economy to stagnate. 

At the same time, smaller investors and savers are struggling to find ways to make a reasonable return on their long-term investments. Funding Circle aims to unite the two needs in a mutually profitable marketplace where individuals can lend directly to small businesses, cutting out the cost and complexity of bank loans and allowing investors to support businesses that appeal to them ethically, profitably or for other reasons such as personal interest.

Limited risk and social leverage opportunities

Like Zopa.com, the concept behind Funding Circle is one of limited risk for each individual who can select the division of their funds between businesses so their exposure to individual companies could be as low as £20 or up to around £2,000. The advantage for businesses is that the loan rates will undercut the bank rates by up to 25%.

Bright businesses will shine

It could be a lifeline for businesses that have a quirky service or offering that has strong niche appeal but might not ever become mainstream, or those can make a grassroots appeal to a particular sector of society. For such socially appealing enterprises, the lower rates are only part of the appeal – being able to engage directly with funders can allow entrepreneurial businesses to communicate in fresh ways and to share their journey with supporters using loyalty-building messages that turn funders into advocates and salespeople, widening the company reach without adding a costly PR layer.

There’s a caveat for potential funders: any money invested through the scheme won’t be covered under the Financial Services Compensation Scheme and while there are risk-spreading methodologies in place to keep any potential problems to a minimum, if complete investment security is important to a funder, then this isn’t the right route for them.

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