Andrew Jackson, head of collections and recoveries at Funding Circle, explores alternative lending.

Before the recession, the vast majority of small business lending was through 5 high street banks. In recent years, many of these banks centralised their credit processes, and servicing small and medium enterprise (SME) customers became expensive. Then Basel III and various regulatory penalties made SME lending even more undesirable.

Yet small businesses still needed funding. They are the lifeblood of the economy, and the future of the UK.

One major consequence of banks’ lack of appetite to lend was the arrival of a number of alternative lending providers to help businesses access the finance they need, including Funding Circle in 2010. In just 4 years, Funding Circle has facilitated over £350 million of new money to businesses, and is currently originating about £6 million of new loans every week. 

While not quite on the same scale, this is a similar story to most alternative lending providers in the UK. After all, you only get new markets and growth where there is a demand. 

How does alternative lending work?

Funding Circle, like other peer-to-peer lenders, is an online marketplace that introduces businesses to investors who want to lend to them at the interest rates they are happy with. Whether through a reverse auction, or a benchmarked fixed rate, borrowers are offered a market rate on their loan, and have complete transparency on how that rate has been reached.

Another benefit is the avoidance of anything to do with the London Interbank Offered Rate (LIBOR).

Here are some of the other reasons why peer-to-peer lending may be more preferable than what’s offered by high street banks.

Faster access to finance

Compared with banks, alternative lending providers are smaller, nimbler organisations. They can make decisions quickly, without the red tape that banks have to contend with. Peer-to-peer platforms can provide finance extremely quickly; it can take as little as 2 weeks to borrow up to £1 million through Funding Circle (though most loans are for about £60-£70,000).

No hidden costs

Peer-to-peer platforms pride themselves on complete transparency. There are no hidden costs charged for breaching covenants, restructuring loans, or for add-on products that the borrower doesn’t need.

Less onerous security requirements

Most banks have onerous financial and reporting covenants, and often require security against the family home of the directors and shareholders of the business. Many alternative lending providers are covenant-lite, and unsecured lending is often supported by personal guarantees, without security against homes. Robust credit assessment processes and risk models allow alternative lending providers to commit to their decisions and allow the borrower get on with their business, provided all repayments come in on time.

Enlightened debt collection

Unlike banks, alternative lending providers are not influenced by annual provisions for write-offs, bonuses for employees, or revenue streams in restructuring fees. Where a bank may take an aggressive course of action to clear its bad book, or to generate more fees, alternative lending providers are subject to extreme scrutiny by investors who suffer losses, and investors are not often attracted to high-risk distressed lending.

At Funding Circle, the aim is to give a borrower the time to get back on their feet, or an entrepreneur time to start a new business, in order to achieve a full recovery in due course. In return for time, transparency and responsiveness is all that’s required. 

It’s often said that you can’t do today’s job with yesterday’s methods and expect to be in business tomorrow. This is why we believe that alternative lending providers are the future of SME finance. Businesses feel more comfortable dealing with alternative lending providers, who are often small businesses, too. Together, alternative lending providers and small businesses share the same modern values and way of doing business.

About the author

Andrew Jackson qualified as a solicitor in 2004. In 2013, he joined Funding Circle as the head of collections and recoveries.



Funding Circle is authorised and regulated by the Financial Conduct Authority under Interim Permission. Funding Circle is not covered by the Financial Services Compensation Scheme. To find out more,  visit the website or follow on Twitter @fundingcircle.