Funding Circle is one of the rising number of peer-to-peer (P2P) lending sites available on the Internet. In all the Funding Circle reviews you will read, what distinguishes the company is that it focuses on business loans, and not on personal loans where most other P2P lenders are concentrated.
This is an important lending niche, not just for borrowers, but also for investors. The business loans market is poorly served by the traditional banking industry, and even by P2P lenders. Business loans are generally considered to be higher risk than personal loans, so many lenders avoid making them entirely.
But that creates some interesting opportunities. If you are a borrower, Funding Circle may open up a credit source that would not have existed before. And if you are an investor, you will have an opportunity to invest in different businesses, rather than just in personal loans.
We’re going to take a look at both borrowing and investing through Funding Circle.
About Funding Circle
Funding Circle is a global P2P lending platform, that operates in the US, the United Kingdom, Germany, Spain and the Netherlands. Loan funding is provided by more than 43,000 individuals, plus the UK Government, local councils, a university, and a number of financial organizations.
Funding Circle has made more than $2 billion in loans to over 15,000 small businesses in the countries where it operates, as of February 2016. That's an important distinction – it's not unusual for banks to make loans to medium-sized and large businesses, but they aren't nearly as active when it comes to the small business market. But that is exactly the market that Funding Circle specializes in, small businesses. So if you are a small business owner, discovering Funding Circle could be your lucky day.
In fact, Funding Circle's US operations were started by people who were themselves small business owners. They knew how difficult it was to get small business financing from banks, even when you have a successful business. Realizing that the banking system does not work for small business, they went to work on development a better credit alternative for the niche.
The Trustscore for Funding Circle with TrustPilot is 9.5 out of 10, or “Excellent”. That rating is based on 557 reviews of the P2P platform. This puts it in similar company with the largest P2P lender Lending Club. The company has also been accredited by the Better Business Bureau since December of 2013, and has a rating of A+ on a scale of A+ to F.
The company has offices operating in San Francisco, London, and Berlin, and has been featured in several major media outlets, including the New York Times, the Wall Street Journal, the Financial Times, CNBC, TechCrunch and Bloomberg Businessweek.
Borrowing Through Funding Circle
Here's how Funding Circle business loans work:
Loan amounts. Funding Circle is more generous than other P2P lenders, who generally limit loans to not more than $35,000. Funding Circle will lend those who need a personal loan from a minimum of $25,000 up to a maximum of $500,000. That's the kind of capital that many small businesses really need.
Loan terms. Similar to Prosper loans, Funding Circle loan terms range from one year to five years.
Loan purpose. Funding Circle makes loans available for purposes that will benefit many small businesses. You can refinance existing debt, hire more employees, buy inventory or equipment, or move or expand your space.
Dedicated loan specialist. One of the concerns that many people have in borrowing money through a P2P site is the fear of having to navigate the entire process on their own. That can be especially difficult you're looking for a business loan. For that reason, Funding Circle provides each borrower with a dedicated loan specialist who will be appointed to you once you complete your loan application.
The loan specialist can walk you through the process, be available to answer any questions you have, help you to provide necessary documentation, and streamline the entire process.
Minimum borrower requirements. In order to qualify for a loan with Funding Circle, your business must demonstrate the following:
- Minimum time in operation (generating revenue) – 24 months
- Profitable in at least one of the last two years
- Minimum annual revenue of $150,000 in each of the two most recent calendar years
- Credit – see below
Minimum credit requirements. You must have a minimum credit score of 640, however Funding Circle recognizes that credit information may be inaccurate, and will not rely entirely on FICO scores. There must also be no bankruptcies or judgments within the past seven years, and there can be no material outstanding tax liens, and no significant unsatisfied judgments.
Collateral requirement. All loans are secured by the collateral of the business – perfected by a UCC-1 filing – as well as by executed personal guarantees by the owners of the business.
The loan application process. This is handled entirely online, and you can complete the application in less than 10 minutes. A Funding Circle representative (loan specialist) will usually get back to you within two hours.
The loan will be underwritten and you can generally expect a loan decision within 72 hours of application. And once approved, you can receive your loan funds in less than 10 days.
When you apply for a loan through the platform, the loan is pre-screened and assigned an “FC Rating” and interest rate by Funding Circle's underwriting team. FC Ratings are A+, A, B, C, and D. The rating is based on a combination of gross revenue, EBITDA (Earnings Before Income Taxes, Depreciation and Amortization), DSCR (Debt Service Coverage Ratio), and FICO score of the business owner (which again, must be a minimum of 640).
Funding Circle requires the following documentation with your loan application:
For loans under $300,000, the only documentation required is:
- 2 years (most recent) business tax returns
- 1 year (most recent) personal tax return (including W-2s)
- 6 months (most recent) business bank statements
For loans over $300,000, they also require the following documents:
- 6 months (most recent) business bank statements
- YTD balance sheet and income statement
- Outstanding Business Loans & Credit Worksheet (available upon request)
Your loan specialist can help you in assembling required documents.
Interest rates and fees. Interest rates are determined by your FC Rating, and can range from 5.49% to 27.79%. Funding Circle also charges an origination fee, which can range from 1.49% to 4.99% of the loan amount. There are no prepayment penalties in the event that your loan is repaid early. Late payments are assessed a charge of 10% of the amount of the payment due, with a minimum of $35.
Borrower resource page. As a provider of business loans, Funding Circle has a natural interest in the success of your business. For this reason they provide a dedicated resource center page that is filled with articles with advice on how to improve the operation and profitability of your business.
Investing Through Funding Circle
As mentioned earlier, over 43,000 individual investors have invested their money through Funding Circle. They've invested more than $1.5 billion since 2010. They invest through Funding Circle Securities, which is the affiliated broker-dealer of Funding Circle USA. Funding Circle Securities is a regulated broker-dealer, and is registered with both the Financial Industry Regulatory Authority (FINRA) and with the US Securities and Exchange Commission (SEC).
Investor requirements. Since you will be investing in business loans, which are considered higher risk than loans to individuals, you are required to be an accredited investor in order to invest through Funding Circle.
According to the US Securities and Exchange Commission, an accredited investor is defined as anyone who…
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Borrower profiles. Funding Circle lends to established small businesses, which means those that have a demonstrated operating history, cash flow, and a strategic plan for growth. They do not lend to business startups.
Most loans fall within the $50,000-$200,000 range with regard to loan size. Most are in business between four years 14 years. Loans are provided to businesses located in 49 states.
As noted in the borrower section above, a borrower must be in business for a minimum two years, and profitable for at least one of those years. Businesses must also have a minimum of $150,000 in revenue in the two most recent calendar years, and it must have no bankruptcies or judgments within the past seven years, and no outstanding tax liens or significant unsatisfied judgments.
Required minimum investment. Funding Circle requires a minimum of $50,000 to open up an account. The minimum note size that you can invest in is $500, which means that you can invest in up to 100 notes with the required minimum account size.
Account types. Accounts can be set up for individual accounts, institutional accounts, and both traditional and Roth IRAs.
Investor portal. You can track and monitor your Funding Circle investments through your account summary. There you can keep track of your portfolio value, annualized return, pending orders, and more
Selecting notes to invest in. Funding Circle works with an online marketplace, where you can select the individual notes that you want to include in your portfolio. You can browse and purchase notes easily on the “Browse Marketplace” screen.
One of the real strengths of the Funding Circle investing platform is the incredible volume of information that it provides on the individual businesses that you will invest in.
The platform provides a “Business Info” tab, that provides operational information about the business, including its geographic location, years in operation, and the number of employees that it has. By clicking “Business Profile” you can also view a short description of the company's business operations.
There is a “Financial Details” tab where you can access the income statement and balance sheet of a business, and even download them in a CSV format. The “Loan Information” tab provides key attributes of the loan, including debt coverage ratios, existing debt obligations, and the loan guarantors' credit scores.
But like other P2P lending platforms, you can also set up automated investing. You can do this by setting your desired investment criteria for the notes that you want to buy, and the system will automatically purchase notes for you as they become available.
Expected income. Funding Circle charges gross annual coupon rates on loans ranging from 5.49% to 27.79%. These are the rates you will be paid before the annual investor fee (1%) or potential loan losses are calculated into the return.
Investors can also earn additional income on late payments made by borrowers. Funding Circle assesses a late fee of 10% of the amount of the payment due (with a $35 minimum), and splits 50% of the late fee to the investor.
Tax filing requirements. Funding Circle will issue IRS Form 1099-INT for interest income that you earn. The form will be filed with the IRS and provided to you by January 31 following the end of the tax year.
Investor fees. Funding Circle has a service charge on loans equal to 0.083% per month (1% per year annualized). The fee is calculated on the basis of the remaining outstanding principal balance of the loan prior to applying the current payment.
No secondary market for notes. It's important to understand that once you invest in a note, you must hold it to maturity. Loan terms of range from one year to five years. There is no secondary market where you can sell the notes to another investor, or back to Funding Circle. The platform also recommends that you diversify your holdings to include a minimum of 50 notes in your portfolio. That will minimize the impact of a default by any one loan.
If you are in need of a business loan, or if you're looking to specifically invest in business loans, Funding Circle is an excellent P2P platform to use. As a borrower, you are more likely to get a loan approval than if you apply for a business loan with a bank. And if you are an investor, you will get much higher returns than you can on your bank investments, or other comparable fixed income investments offered elsewhere.
Check out Funding Circle if you're curious, and you may find yourself taking the next step by applying for a loan, or opening an investment account.