Sam Hodges, co-founder and US managing director of Funding Circle, used to run a chain of successful fitness gyms in 2007. That’s when he realised the US banking system was broken for small business owners.
Although his business was profitable and he had a healthy credit score, Hodges just couldn’t get the loan he needed to expand his business. Banks repeatedly declined his loan applications and other online finance companies offered terms that “simply didn’t make sense.”
After getting turned down for the 96th time, Hodges realised something was definitely wrong. Big companies with tens of millions in revenue and hundreds of employees were able to easily secure loans exceeding $US5 million. But it was nearly impossible for companies of his size, with a few million dollars in sales and less than 50 employees, to find bank loans.
“There’s a big gaping hole, and that gap has gotten worse over the last five or six years,” Hodges told Business Insider.
So Hodges launched an online marketplace called Emergence Lending Network. His peer-to-peer lending network, which last year merged with the UK-based Funding Circle, provides a marketplace where small business owners could borrow money directly from individual or institutional investors.
The way it works is pretty simple. Once you pass its online eligibility test (which takes roughly 15 to 30 minutes), Funding Circle’s own underwriters go through a verification process to ensure you’re eligible to apply for a loan. During this process, it looks into a lot of data, including credit score and profitability, as well as things as small as the quality of social media presence and yelp reviews, to determine the health of the business. Based on this, each borrower is given a grade and loan terms, which help lenders decide which businesses are better to lend to. Hodges says on average it takes less than two weeks to complete a loan.
Funding Circle has processed over $US750 million since 2010 in the US and UK markets, and it expects to lend out more than $US1 billion in 2015. So far, it’s raised over $US123 million from Accel Partners, Union Square Ventures, and Index Ventures.
Funding Circle is part of a larger group of online lending platforms, and the whole sector has been growing rapidly. Lending Club, for example, is now valued at over $US3.75 billion and has filed for a $US500 million IPO in August. Prosper, another P2P lender, was last valued at $US650 million. In fact, all three of these companies were mentioned in a recent report by Karen Mills, former Administrator of the US Small Business Administration, for using technology to help businesses gain better access to capital.
“Emerging online players are filling the technology void left by many banks, and pushing innovation within the banking sector in the same ways in which other online upstarts such as Amazon.com changed retail and Square has changed the small business payments business,” she wrote.
But what makes Funding Circle different from the rest is its laser focus on small businesses, Hodges says. “Our main message is small businesses can turn online and use marketplaces like ours to get access to finance.”