Funding Circle announced on Wednesday that it raised an additional $US150 million, led by Russian billionaire Yuri Milner’s DST Global with participation from Baillie Gifford, BlackRock, Sands Capital, and Temasek.
The new funding round brings the total amount raised to over $US273 million, including the $US65 million it raised last July. Funding Circle declined to disclose its latest valuation.
“This investment round really speaks to the acceleration of our business,” Funding Circle’s US Managing Director Sam Hodges told Business Insider.
Funding Circle is part of the growing peer-to-peer, online lending space that includes companies like Lending Club and OnDeck, both of which went public last year. These companies provide the marketplace for borrowing and lending money, much like Amazon is a platform for connecting consumers to retailers online.
Funding Circle tries to differentiate itself by solely focusing on small businesses, a customer base that’s historically been overlooked by most large banks. Its unique data algorithm and human expert vetting process make it easier and faster for small businesses to get a loan. More than 7,000 small businesses have used its platform, generating more than $US1 billion in total loans so far. It takes less than two weeks on average to complete a loan on Funding Circle, Hodges says.
But, in a larger context, Funding Circle’s new investment is also indicative of how technology is helping the financing environment for small businesses, a segment that employs a huge chunk of American workers – roughly 120 million people, or half of the private sector’s workforce.
The impact of these online lending startups is well-explained in a report published by Karen Mills, former Administrator of the US Small Business Administration. Some of the points that stick out include:
- Small businesses create two out of every three net new jobs: The report says since 1995, small businesses were responsible for about 65% of total net job creation in the US.
- Small businesses were hit harder than large firms during the financial crisis: From 2007 to 2012, small businesses accounted for about 60% of the total job losses. Especially the smallest firms, with less than 50 employees, saw the largest decline at 14.1%, nearly double the overall employment loss of 8.4% in that period.
- Bank loans have historically been difficult to get for small businesses: In fact, it’s been getting worse for small businesses. Loans allocated to small businesses are down about 20% since the financial crisis, while loans to larger businesses have gone up by 4% in the same period.
- Share of small business loan is shrinking: Small business loans accounted for about 50% of total bank loans in 1995, but dropped to 30% in 2012.
- Small community banks are disappearing: Community banks, the primary source of loans for small businesses, have dropped from 14,000 in the mid-1980s to less than 7,000 today. Community banks were 48% more likely to approve small business loans vs. 13% approval by big banks.
- New online marketplaces are disrupting the traditional market for small business loans: They’re easy to use, faster to process, and have data-driven algorithms that more accurately screen creditworthy borrowers.
- Only a tiny share of small businesses are taking advantage of the online loan market: Online lending market represented less than $US10 billion in outstanding loan capital in 2013, nearly 70X smaller than that of the bank credit market.
Wall Street is keeping a close eye on lending startups like Funding Circle. In his annual letter to shareholders, Jamie Dimon noted that “Silicon Valley is coming.”
“There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking,” Dimon wrote. “The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and — these entities believe — effectively by using Big Data to enhance credit underwriting. They are very good at reducing the ‘pain points’ in that they can make loans in minutes, which might take banks weeks. We are going to work hard to make our services as seamless and competitive as theirs.”
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