Funding Circle is a peer-to-peer lending platform that allows individuals like you and me to lend money to small UK businesses for an agreed interest rate. Similar to Zopa, (only investors lend to business owners as opposed to individuals) Funding Circle has attracted lenders and borrowers through its competitive interest rates and accessibility. Lenders can earn a better rate of return on the capital they invest and borrowers can pay competitive rates on their loans.
Funding Circle has been around for just over two years at the time of writing (it launched August 2010). Like other peer-to-peer lending platforms, Funding Circle is still in its infancy.
What’s the Fuss?
Funding Circle is attractive to investors for the following reasons:
1) The rate of return beats all of the best savings accounts currently available. Funding Circle boasts a net return of 6.2%. Even if you take into account that all earnings from Funding Circle are taxable – both higher and average tax payers earn a better rate than they would in the best easy-access ISA on the market. Even regular savers don’t beat the rate with the best one currently offering 6% gross (before tax) and that’s only if you qualify.
2) You’re helping small businesses in the UK. When searching through companies’ bids for loans you can view their background including what the loan is for, why they are safe to lend to and their credit score. There’s even a section where the company answers questions from investors to help you inform your decision.
3) Diversification. Each loan requested by borrowers is divided into loan parts which investors can ‘bid’ for. The company may be asking for £10k but you can lend as little as £20 (by bidding on a loan part). This means that if you invest £5k into Funding Circle you can lend to over 250 different businesses. If one borrower defaults on their loan you may be out of pocket but it will only be by £20 rather than the entire £5k (to date I have not had anyone default on their loan – I joined January 2013). There is flexibility to lend more than £20 to any one business but I prefer to stick with the lowest amount possible. You can go in and bid on individual loan parts or you can use the autobid tool which automatically bids on your behalf – all you need to do is select the percentage of your total funds that is to be lent to any one business (I currently lend no more than 2% to each business but this can be set to be as low as 1%), select which risk grades (A+ to C) you wish to lend to with A+ being very low risk and C average risk and then set your desired interest rate for each risk band.
You Don’t Need Much to Get Started…
You can start investing with as little as £20 and there is no maximum amount cap on the amount you lend. As a lender you need to provide your usual basic details (name, date of birth etc.) and current account details for the initial investment.
Accessing your money depends on how quickly you can “sell” your loan part to another investor. Funding Circle says that on average ‘it takes two days to sell a loan part’ but if you remember, most loan parts are £20 so if you need to take out everything, I think you’d need to allow yourself at least one working week. Don’t put money in that you might need in a day’s notice.
Regulation from April 2014
One of the aspects of peer-to-peer lending that has discouraged new investors is that currently peer-to-peer lending is not regulated by the Financial Conduct Authority (FCA) – the regulator of all financial institutions in the UK. However, in December 2012 it was announced that the FCA will monitor all lending and borrowing of peer-to-peer lending platforms from April 2014.
Should You Join It?
As with any investment, read several reviews of the services and more importantly the small print on the site so that you fully understand the risk involved. 6.2% net return is not guaranteed and the level of bad debt (loans that have been defaulted on by the company) is currently 1.5%.
My personal rule of thumb for new investments is to have a trial phase of six months to a year when I invest only 1 – 10% of my entire portfolio (cash, bonds and stocks). After using Zopa for a year I doubled the funds that I’d initially invested as I accepted that the investment suited my risk tolerance. Similarly, I will review my Funding Circle account in another few months to see if I should top it up. If you’re still unsure read more from investors who’ve put in far more than I have.
“Even if you take into account that all earnings from Funding Circle are taxed – both higher and average tax payers earn a better rate than they would from the best ISA.”
Funding Circle won’t be the right investment vehicle for everyone. It’s important that you fully understand the platform before investing money. Funding Circle’s FAQs for investors is a good starting point for understanding the platform in more detail.