At the beginning of this month I went to visit a business that I’d lent money to through peer-to-peer lending platform, Funding Circle.
What is Funding Circle?
Funding Circle is an online platform that allows individuals to lend money to small UK businesses for a fixed rate of interest. Similar to crowdfunding for equity, individual investors lend money through the platform as loan parts which are assembled as loans to businesses. Using loan parts helps investors spread the risk of their investment e.g. when investing £1000 an investor does not have to lend that amount to just one business but can use £1000 to lend £20 to 50 businesses or £40 to 25 businesses.
Win-win for investor and business-owner
Investors and business-owners get more from using the Funding Circle platform than from using a traditional bank to achieve the same aims. Business-owners that may have otherwise struggled to gain capital from a bank can use lending platforms like Funding Circle. At the same time investors who’ve earned an abysmal 1% interest rate on their savings accounts in the past have access to some of the best interest rates through Funding Circle ranging from 4 - 8% after deductions (admin fees to Funding Circle and losses from businesses that have defaulted on their loans, which does happen from time to time hence the benefit of spreading your money across multiple loan parts).
Medina Capital Investments is an example of a property development business that was unable to obtain enough capital through a traditional bank, not because it was a risky investment but because banks don't seem to have the capital to invest in large property developments like they used to. Medina Capital Investments managed to get the full £640,000 to develop two family homes in West London.
Seeing the impact of a £20 investment (when crowdfunded!)
At the beginning of December 2015 I visited Medina Capital Investments, one business of around 300 that I’ve lent money to through the platform since I first invested in 2012. A London-based property development company, I was visiting their latest project that was close to finishing - two family homes in West London. Just 12 months previously the same piece of land on which the development had been built sat a large derelict house that hadn't been lived in for many years. I joined the CEO of Funding Circle, Samir Desai and the business-owner, Nidal Al-Khail to see the house which was about 95% complete (rain had delayed the laying of turf in the garden).
Passionate business-owners with in-depth knowledge
Nidal's enthusiasm for property is infectious. His pride is brimming as he shows Samir and I the house while pointing out the quality of fixtures in the 5-bed property spread over three floors. There's CCTV around the exterior of the property for added security which can be monitored on any of the many fixed flatscreens around the house and one of the unique features of the property is a curved exterior with floor-to-ceiling windows at the back of the house which opens up to the yet-to-be-laid garden. Nidal highlights the shadow gap throughout the house which replaces the traditional skirting seen in older houses. He mentions his insistence that the builders make it not even a millimetre thicker than his original specification. Nidal knows exactly what he wants from a finished property.
Funding Circle's process for assessing a business is rigorous and effective.
The detail that Nidal goes into does not seem to be a surprise any of the Funding Circle team. They interviewed him multiple times in 2014 and reviewed his plans prior to accepting the property developer. Funding Circle's process for assessing a business is rigorous and effective but importantly their interaction with the business doesn't stop there. Funding Circle regularly visited Medina onsite to find out progress on the property from demolition through to completion and published a series of online videos for investors.
Funding Circle rated Medina Capital Investments as a low-risk loan and now that I'm here it's easy to understand why. Nidal's different to other property developers. Instead of trying to tackle all aspects of property development on his own he has a small team that have also joined us today. Project manager, Femi is frequently found onsite with the builders to ensure that the business is being billed accurately for the work carried out and as I walked through the door interior decorator was ironing the curtains. Medina Capital Investments is a small operation but seem to be efficient at managing their time: they knocked down a house riddled with overgrown plantation and created a 4-bed and 5-bed property in just over 10 months. What's next for Medina Capital Investments? Nidal shares high-level plans to develop a 14-unit building in Wimbledon.
Growing the UK economy instead of fueling consumerism
By visiting the property and meeting the business-owner I noticed that my £20 investment (along with £20 from 1,000s of other investors) created the following:
1) A 7.5% interest rate. I got my £20 back and then some. The last time I received a high interest rate on my savings was back in 2006 before the financial crisis destroyed all hope of earning a decent income on savings.
2) Two large family homes that replaced a disused piece of land.
3) A profit to the property development company.
4) An injection into the UK economy. The property development company would be paying capital gains taxes off the back of the sale of the new properties.
As an investor of both Funding Circle and other peer-to-peer lending platforms it's easy to see how both platforms would work well in any portfolio but, after visiting this property in West London, I was struck with how much more my £20 was contributing to the economy.
Is my investment creating value?
When I look at my loan book on a different peer-to-peer lending platform, which shows details of individuals I've lent to (not businesses like Funding Circle) and what the money is being used for, I'm pleased to see that many borrowers are using the platform to enhance their personal situation: to consolidate their existing debt, to help pay for the costs of having a baby or to improve their home prior to selling it. Unfortunately I also see less encouraging behavior such as a 23-year-old borrowing £25,000 for a new car or a 40-year-old borrowing £3,000 for a holiday. I don't have any say on how individuals use my money and it feels less responsible to invest in a peer-to-peer lending platform that isn't encouraging positive money behaviour. This is one of the reasons I've only lent £2,000 through Zopa.
On the other hand, Funding Circle lends to businesses that are adding value to the UK economy: providing improved services, products, jobs and paying taxes whilst all the time reinvesting their profits. As a result it feels easier to invest more than double in Funding Circle than I invested in Zopa.
Funding Circle goes beyond by letting lenders and borrowers meet in person, not just virtually.
Connecting lenders and borrowers in person
This visit was the first I'd been invited to but I hope it won't be the last. I hope other investors have the opportunity to visit a business they've lent money to. Funding Circle goes beyond by letting lenders and borrowers meet in person, not just virtually. Sometimes when you invest in peer-to-peer lending your investment feels like it's going into a virtual black box only to emerge with interest in 6 - 12 months later. This suits some investors, but if you're like me you'll appreciate the power of shaking hands with the business owner, having the opportunity to talk to them in person, and most importantly seeing the impact of your investment in person, not just the interest you've earned.
Seeing my money in action
Now that I’ve seen how my money is used, I’m even more convinced that Funding Circle provides a great opportunity to all investors. By investing as little as £100, you can help expand five businesses and also earn a great fixed interest rate - one that still beats all of the high street banks.
A personal investment platform
I found the whole experience helpful and interesting. Transparency is essential to any good business relationship and the visit has increased my faith in Funding Circle as a long-term investment vehicle. It's important to highlight that there’s no hierarchy at Funding Circle for these visits: I was invited to visit the business even though I’d only lent the minimum amount of £20.
Similarly in July 2015 I was invited to an investor evening so that I could pose questions to Funding Circle on changes to the platform. I’m not a high net worth investor with Funding Circle (several investors have tens of thousands invested) but I'm made to feel like a valued investor. I can be as involved as I choose and I can easily withdraw my money if I need to but, why would I when I earn stronger returns than any other investment vehicle in my portfolio? If you’ve been nervous about trying a different approach to investing it’s time to abandon your bank and join the peer-to-peer revolution. Your loyalty will be rewarded.
If you liked this article, try reading these articles next...
- Why invest in peer-to-peer lending?
- Zopa: Peer-to-peer lending experiences of a novice
- The Top 10 Personal Finance Books of All Time
All information provided at Life-Life Balance is for informational purposes only. Maureen McGuinness is not a qualified financial advisor. Before making any decisions on your finances you should seek advice from a qualified advisor.