At a time when some are claiming that marketplace lending has not gone far enough to challenge the traditional banking system, Sam Hodges and Funding Circle have quietly proven that steadily acting on your principles and advancing your mission, can achieve meaningful change. It had been over a year since I last sat down with Funding Circle’s Co-founder and US Managing Director Sam Hodges, so I thought it time to head to San Francisco and pay a visit.
Funding Circle is a marketplace lending platform that focuses on small business loans averaging around $130,000. When asked about Funding Circle’s non-radical tactics and lack of an all out assault on banks, Sam noted that banks play an important role in our economy as aggregators and custodians of deposits, however there is an important place for non-deposit based capital as well. In fact, Funding Circle has no problem being a lead generation tool for banks, as long at it helps accomplish their goal of providing fair financing to small businesses. That is Sam’s number one priority.
Lately, marketplace lenders have been getting a bad rap with respect to the treatment of borrowers and predatory lending practices. Sam noted that commercial lending (lending to businesses) is less regulated than consumer lending (lending to individuals). Smaller company borrowers get taken advantage of due to opaque lending practices, with the merchant cash advance space as the worst example – borrowers are charged astronomical daily fees which work out to a greater than 50% annual percentage rate. This is what Sam and Funding Circle are working against and why they and many other industry leaders have executed the Borrower’s Bill of Rights, to ensure that borrowers can make informed decisions in a completely transparent environment and are treated fairly. Pursuant to these principals, Funding Circle has helped over 12,000 small business attain the capital they need to operate and grow. Funding Circle’s global growth rate is 150%, and in the US they are growing at 300%. The average use of proceeds of the loans provided is for growth and expansion. The average default rate for their loans is 2-3%, which is in line with projections. The average loan size is around $130,000 with a term of one to five years and a rate of 5.5% to 22.7%.
When asked what Funding Circle’s greatest achievement in the past year was, Sam listed several things, including the growth of the business from $60M to a $250M in originations, adding an array of investment products from A+ to D risk profiles, the receipt of a $150M equity infusion to invest in more technology and talent, hiring a slew of top talent plucked from organizations like Amex, Salesforce and Barclays, growing to over 160 US employees by Q1 of next year and the purchase of ZenCap a German based small business marketplace lender with a footprint in Germany, the Netherlands and Spain, giving them a truly global presence. When asked about disappointments in the past year, Sam responded that he wished they had more product coverage to assist more businesses, such as equipment finance and commercial property finance, which is in the works.
The typical US borrower on Funding Circle is from one of 49 states (not Nevada, due to state regulations), has been in business for an average of eight years, has an average of $1.7M in revenue, is from a multitude of industries that range from services to products to light manufacturing to logistics. The typical investor may be one of 40,000 accredited investors or an institution and is seeing returns upward of 10%. In the UK, Funding Circle can also cater to retail investors.
Sam stated that they have no desire to file a registration statement anytime soon – either for the loan participations they offer to investors or to conduct a public offering for the company itself. While they would love to be able to access a broader base of investors in the US, the cost-benefit analysis doesn’t justify the expense and risk. Plus, due to the recent capital infusion, they are not in the market for additional financing at this time.
When asked about a trade association, which boggles my mind that the marketplace lending industry does not have one, Sam thought one would likely develop in the next year. A trade association could assist with addressing industry regulatory issues such as the Treasury’s request for information, to which Funding Circle submitted at 42-page comment letter. Sam noted the important issues are borrower and investor protections, access to and ownership of data and data portability. Since Funding Circle originates its own loans using its California lender’s license, Sam felt the recent Madden v. Midland Funding decision was not really applicable. As for the recent Title III crowdfunding regulations, Sam suggested it was a missed opportunity and not really helpful for most small businesses which are operated on a cash basis and require credit not equity financing.
When asked about the future, in addition to new product offerings, Sam is excited for securitization markets to provide a more permanent capital vehicle. Funding Circle has taken steps to set up that model in the UK and are eyeing the US market for a similar move.
Georgia P. Quinn is the CEO and co-founder of iDisclose, an adaptive web-based application that enables entrepreneurs to prepare customized institutional grade private placement documents for a fraction of the time and cost. Heralded by Thomson-Reuters as a Top Female Attorney in New York City, she also serves as of counsel at the leading firm in crowdfunding, Ellenoff, Grossman & Schole, specializing in facilitating financial transactions and compliance with JOBS Act regulations. A foremost expert in corporate finance, she has worked on over $1 billion in business transactions over the course of her legal career. Prior to founding iDisclose, Georgia represented several Fortune 500 companies in financings for six years at Weil, Gotshal & Manges, one of the top ten law firms in the world, and then for over two years at Seyfarth Shaw, a leader in legal technology. As a globally recognized thought leader in the crowdfunding space, she has been a featured speaker at multiple conferences and has presented to such authorities as the Securities and Exchange Commission (SEC) and the American Bar Association (ABA).