Social lending offers small businesses a lifeline

Funding Circle claims to help small enterprise and hard-pressed savers at the same time, but is that true? Julian Knight investigates
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British business is having the life strangled out of it by the banks charging over the odds for loans and calling in debts at short notice, say the UK's small enterprises. So what is to be done? One entrepreneur, James Meekings, has an idea and he'd like you to fork out for it.

He has co-founded Funding, a social lending site for small business. Social lending sites were pioneered in the UK by Zopa, which aims to match up people willing to lend money to those individuals needing loans. Now Mr Meekings and Funding Circle are doing the same thing for the corporate sector.

The idea is simple: individuals pay money into the site and it is distributed in the form of loans to businesses. The borrowing firm pays interest which is then passed on to to the investor who has put up the cash for the loan. Different rates of interest are charged according to the risks of the company defaulting – all assessed through standard credit scoring and a team of experienced underwriters.

"The investors get a higher rate of return – typically between 6 and 7 per cent – while the borrowing firm gets a loan at a cheaper rate and with fewer complications than they would often find through a bank at the moment," Mr Meekings said. In fact, he estimates that loan costs are about a third cheaper. "The distortions in the market have created a space for a social lending model but we lend only to credit-worthy companies. Limits on loans are £50,000 and the average age of the business that we have applying for loans is 30 years."

Investors can choose to invest a lump sum in a particular company or they can pool their money with other investors and see it go in small portions to lots of different firms, spreading the risk. "You can pay up to £2,000 in a loan to an individual firm or as little as, say, £20 spread between lots of borrowers."

The potential rates of return for investors are certainly better than with savings accounts. "The average instant access savings account is paying only 0.74 per cent," said Michelle Slade from financial information service "Even the best returns don't rival the rates offered by Funding Circle, with the best one-year bond paying 3.10 per cent (ICICI Bank UK) and the best easy access account paying 2.80 per cent (AA Internet Extra Account)."

Like Zopa, Funding Circle is a facilitator rather than an actual provider; any money invested with it is not covered under the Financial Services Compensation Scheme should the worse happen. Facilitators have methods in place to spread risk, so it is kept to a minimum. However, savers after complete security for their money may be better off with the savings account route.

"Apeing the Zopa model is well and good, but with a business there are far more things that can go wrong than with an individual. I think it's something you may want to have a bit of a punt on but don't bet your life savings," said Andrew Hagger from