Peer to peer lending is a multi-billion industry and still growing. This growth is accelerated by the flexibility and convenience it offers over the traditional banking system. Today, P2P platforms are the go-to places for personal loans, but what about the business loans niche that has been inadequately served by banks and even by P2P platforms?
In this Funding Circle review, we examine a platform dedicated to business loans and the pros and cons of borrowing and investing through it. Read on.
- 1 What is Funding Circle?
- 2 How Funding Circle works
- 3 What Types of loans are offered by Funding Circle?
- 4 Funding Circle Loan requirements
- 5 Funding Circle Loan application process
- 6 Do I qualify for a Funding Circle loan?
- 7 Investing in Funding Circle
- 8 How to start investing in Funding Circle
- 9 Choosing investments on Funding Circle
- 10 Automated investing
- 11 Risks associated with investing in Funding Circle
- 12 How Funding Circle minimizes risk for Investors
- 13 How much can I earn on Funding Circle?
- 14 Who is eligible to be an investor?
- 15 Funding Circle Review: Verdict
- 16 FAQs
What is Funding Circle?
Funding Circle is a peer-to-peer lending company that was founded in August 2010 in the United Kingdom. It is credited as the first lender to use the peer-to-peer lending model for business funding in the UK. The company connects established businesses in need of funding to investors through its platform and earns money by them a service fee.
The company later merged with Endurance Lending Network to expand its business to the US in 2013. Today, it operates in the UK, Germany, Netherlands, the US and it is planning to expand to Canada later this year. Funding Circle is listed on the London Stock Exchange and is one of the platforms with the highest loan originations in the world.
In this review, we are going to focus on Funding Circle US
- Secured loans – reduces the risk of losing your entire investment in case of default
- Automatic investments for those who want a hands free experience
- Rigorous assessment that reduces the number of bad loans
- Fast approval of loans
- Fixed interest rates
- Variable term lengths (1 – 5 years)
- No prepayment penalties
- Lower rates compared to other lenders
- No secondary market in the US platform
- High 1% annual service fee
- High minimum investment of $25,000 and $500 per note (compared to £1000 for the UK platform)
- Investment in the US is only open to accredited investors
- High interest and fees
- Stringent borrower requirements, compared to other lenders
- It is not for start-ups or recently launched businesses
- It’s fast but still not the fastest approval time in the market.
How Funding Circle works
Similarly to other p2p platforms like LendingClub, Funding Circle is a peer-to-peer lender that connects creditworthy businesses in need of funds to individual and institutional investors on their platform. It evaluates the borrower, and if approved, the loan is presented to investors who invest in parts of the loan. Funding Circle offers medium-term loans with the term lengths ranging between six months and five years.
Funding Circle earns by charging the borrower an origination fee of between 3.49% and 6.99% and a 1% annual fees based on the unpaid principal balance is deducted from the borrower’s repayment. No other fee is charged to the investor.
What Types of loans are offered by Funding Circle?
Funding Circle only offers installment loans to established businesses that require financing in a short period. The loan term lengths of the loans range from six months to five years. Businesses can obtain loans between $25,000 and $500,000 on the US platform with rates starting from 4.99% up to 29.9% based on the businesses creditworthiness.
Most of the businesses in the company’s US market borrow to boost cash flow, buy new equipment, grow the business size, refurbish premises, cover one-off costs or hire extra staff. However, most new businesses do not qualify for the platform’s loans as it requires a minimum of 2 years in business.
Funding Circle Loan requirements
Funding Circle’s US business loans are secured although the company does not specify the type of collateral it requires. Instead, it files a lien on your general business assets. For loans under $300,000, the company requires your recent personal returns, two recent business tax returns, and six recent business bank statements. For loans over $300,000, Funding circle will need your business’s income statements, balance sheet, outstanding business loans and credit worksheets in addition to the documents required for under $300,000 loans.
Funding Circle Loan application process
To get a business loan, you have to apply online providing details such as the amount you wish to borrow, legal business name, majority owner’s name and contact details in the first step.
The second step is to provide business details, including industry type, state, number of employees, what you intend to use the funds for, business location, outstanding debt, and business ownership.
In the majority owner’s profile, you are required to provide legal identification in the form of your social security number, address and whether you own or rent your home.
The last step is to upload the required documents, tax returns for the last two years, personal tax returns and operating bank statements. After submitting the application, you are assigned a personal account manager who calls you about the next steps or for additional details or documents about your business.
Funding Circle checks your application and sends you back their offer within a day, including your origination fee and interest rates. If you accept the offer, you will receive the funds within a few days. The loan application takes about 10 minutes and the whole process about ten days or less.
The interest rate offer is determined by your creditworthiness, how long you have been in operation, business strength, industry type and the loan term length.
Do I qualify for a Funding Circle loan?
To be eligible for a loan on the platform, you must:
- Be at least 24 months old
- Have no bankruptcies over the last seven years
- Have no tax liens over the last 10 years
- A credit score of 620 and above
The average funded borrower on the platform has a credit score of 700. Funding Circle only deals with established businesses although it does not have a minimum annual revenue requirement but, you will need to produce documentation proving a solid business operation.
Funding Circle does not lend to non-profit organizations, gambling businesses, marijuana dispensaries, weapon manufacturers, pornography and businesses in speculative real estate.
Investing in Funding Circle
Hundreds of individuals and institutions invest in the loans originated by Funding Circle in the US. On 1st March, the platform announced that it had facilitated the funding of loans worth more than $2 billion to small businesses in the US since 2013, a number greater than what almost 98% of FDIC insured banks facilitated in the same period.
By investing on the platform, you are purchasing interests in the loans originated by Funding Circle, or notes.
Note that you hold the entirety of the risk and you cannot make a claim against the company if you lose your money from defaults.
How to start investing in Funding Circle
The first step towards being an investor on any p2p platform is opening an account. A form requiring you to fill in your name and working email address appears. The next step is choosing the account type you want to open, either an individual investor, single member entity/Corp/trust or LLC, Entity/Corp/trust or LLC or an Individual Retirement Account (IRA).
To be able to proceed, you must prove that you are an accredited investor. An accredited investor according to Securities and Exchange Commission is one whose income exceeds $200,000 or $300,000 together with a spouse in the last two years and expects the same for the current year. Or, one with a net worth of over $1 million, alone or with a spouse. It also applies to trusts with over $5 million in assets or one where all equity owners are accredited investors.
Funding Circle will send you a verification email after which you will be required to create your profile and upload identification documents.
Once you have opened an account and Funding Circle has verified that you are an accredited investor, you will be required to transfer a minimum of $25,000 into your account.
Choosing investments on Funding Circle
The platform allows you to choose notes individually or using the Auto Invest tool. The minimum investment per note is $500 and you cannot invest 2% of your entire investment on one note.
The investor portal enables you to see details including the industry it is in, location, number of employees, and years it has been in operations. You can also view their financial details including credit score details and existing debts.
The platform has an auto invest tool that allows you to specify your risk appetite and loan terms of the loans you would like to purchase. By using the auto invest tool, all repayments and available funds in your account will be reinvested as soon as they reach the minimum investment amount of $500.
This is to help you diversify your portfolio and allow your interest to compound. The auto invest tool can be turned on or off anytime. If you prefer to choose the investments manually.
Risks associated with investing in Funding Circle
Like every other peer-to-peer lending platforms, Funding Circle investors stand the risk of losing their investments. You should be aware of these risks:
- Delinquency and default – sometimes the business may miss a payment or not pay the loan entirely despite Funding Circle’s rigorous assessment. The loans are secured but you may still lose part of your investment when no recovery can be done. To discourage borrowers from missing payments, Funding Circle charges a late fee of 10%, and when there is no contact with the borrower, the loan defaults after three months.
- Interest risk – Funding Circle allows early repayment of the loans and does not charge borrowers for that. This means you will not earn the interest rate you would have if the loan was repaid at the end of the term. Instead, the repayments will be invested into other notes by the auto invest tool.
- Liquidity risk – Funding Circle does not offer a secondary market for US investors. You should, therefore, invest if you intend to hold the loan until maturity.
How Funding Circle minimizes risk for Investors
While it is not a guarantee that there will be no bad debt, Funding Circle tries to minimize the investor risk by:
- Diversification – the platform requires a minimum of $25000 initial investment and you cannot invest more than 2% of the total funds into one note. This reduces your exposure if the note defaults.
- Strict requirements and assessment of loans – Funding Circle ensures that only businesses that pass their rigorous credit assessment make it to funding. Therefore, only creditworthy businesses are approved, however, this cannot guarantee that the loan will be repaid.
How much can I earn on Funding Circle?
Your returns depend on the risk appetite, how well you diversify your investments and amount of bad debts. Investors on the platform earn annual returns of 5% to 7% according to the platforms historical annual returns calculations. However, the platform offers loans with up to 27.79%. The interest rates are before the 1% service fee.
The platform charges a 5% late fee on late repayments with 50% of the late fee going to the investor. Funding Circle does not charge any other fees to the investor but bank transactions such as deposit and withdrawals may have charges.
The earnings from peer to peer lending are taxable but the platform does not withhold any taxes, it will, however, provide you with IRS Form 1099. Consult your tax professional for taxation requirements.
Who is eligible to be an investor?
To invest in Funding Circle you must:
- Be above 18 years and have a social security number
- Be an accredited individual or institutional investor
- Have a minimum of $25,000 for the initial investment.
Funding Circle Review: Verdict
Funding Circle is a great peer-to-peer lending platform with years of experience and an amazing portfolio. They have great customer service and support system. The application process may take longer than other p2p platforms but it is still shorter than applying for a bank loan.
Businesses that can get approved for a Funding Circle loan can get better rates from banks, but the quick access to funds may be worth the trade-off. Investments, on the other hand, are exclusive to high net worth individuals.
No, the platform does not offer a secondary market in the US. You have to hold the investment until maturity. Funding Circle is registered and regulated by Financial Industry Regulatory Authority (FINRA) as a broker for the notes. It is also regulated by the Securities and Exchange Commission and by each state it operates in. It is also regulated directly by the California Department of Business Oversight and the Federal Trade Commission on the federal level. No, it does not withhold any taxes. No, the platform does not charge you for paying your loan off early. You also pay interest for the time you hold the loan. No, US investors can only invest in US loans, same case to UK, Germany and Netherlands. Yes, all loans in the US market are secured by a non-real estate collateral. The collateral can be in the form of equipment, vehicles or inventory. According to the Securities and Exchange Commission, this is a person who earned above $200,000 or $300,000 with a spouse in each of the prior 2 years and expecting the same current year, OR, a person with a net worth of over $1 million, alone or together with a spouse.
No, the platform does not offer a secondary market in the US. You have to hold the investment until maturity.
Funding Circle is registered and regulated by Financial Industry Regulatory Authority (FINRA) as a broker for the notes. It is also regulated by the Securities and Exchange Commission and by each state it operates in. It is also regulated directly by the California Department of Business Oversight and the Federal Trade Commission on the federal level.
No, it does not withhold any taxes.
No, the platform does not charge you for paying your loan off early. You also pay interest for the time you hold the loan.
No, US investors can only invest in US loans, same case to UK, Germany and Netherlands.
Yes, all loans in the US market are secured by a non-real estate collateral. The collateral can be in the form of equipment, vehicles or inventory.
According to the Securities and Exchange Commission, this is a person who earned above $200,000 or $300,000 with a spouse in each of the prior 2 years and expecting the same current year, OR, a person with a net worth of over $1 million, alone or together with a spouse.