ALMOST every Thursday night for a year, three friends gathered in each other’s kitchens to debate their new business idea – an online peer-to-peer lending marketplace.
James Meekings, Samir Desai and Andrew Mullinger, who had met while studying at Oxford University, were convinced there was a better way of ensuring small businesses accessed finance without having to go to the banks.
The start of the financial crisis had triggered a wave of stories in the media about small businesses struggling to get the necessary backing. “You just read all over the papers how there were good, strong businesses, not being able to access finance in order to grow”, recalled Mr Meekings.
“And your first reaction to this is, maybe they are not good and strong, maybe it’s just the media having a go at the banks. But we looked at how they were performing and actually some of these businesses were good businesses and the issue was with the banks, not with the small businesses. So then the question became, how do you get more finance to these businesses?”
Funding Circle launched in 2010 and has since enabled investors to lend more than £75m to businesses across the UK. In Yorkshire, 50 firms have received more than £2.25m of loans through the website. Last week, it launched a new partnership with the University of Huddersfield, which is to invest in firms through Funding Circle, with any interest earned channelled into scholarships for disadvantaged students on its enterprise development degree.
And the Government recently announced plans to lend £20m to small businesses through Funding Circle, while Lancashire County Council became the first local authority to start lending through the organisation.
Speaking to the Yorkshire Post in Huddersfield, Mr Meekings said: “The market is absolutely huge across the UK,” he said. “We estimate there’s something like £7bn of new SME loans every month. So what we’re seeing growth of is more and more businesses becoming aware of us.
“I think it’s really exciting. In the early days we did smaller loans, so we launched with loans just up to £50,000, and now we do loans up to £500,000. And we did a £300,000 one in two hours last week.”
An Oxford graduate in economics and management, Mr Meekings said he has “always been quite entrepreneurial”. At school he chose to pursue business studies, while at university he was the entertainment officer for his college. “So you’d organise all the parties and of course you’d have to make money out of them to hold the next one so I learnt basic skills from that,” he said.
“I was always interested in what makes the world go around,” he added. “And it was funny because at school if you’re interested in that a lot of people think, ‘oh well if you’re interested in that, that’s really boring’, but for me it was just the mixture of how humans interact, and how that forms organisations and how organisations behave and so on.”
Post-university, Mr Meekings became a management consultant for OC&C Strategy Consultants, a profession he would recommend to anyone thinking of starting a business.
“I worked there for five years and I would have worked across 15 different industries across 100 different companies, who can get that experience when they start? But the one thing it did teach me was that I wanted to do something myself.”
Mr Meekings teamed up with Mr Desai and Mr Mullinger and Funding Circle was born. “When we started to think about it, small businesses employ over 50 per cent of the working population so they’re hugely important and they get nearly all of their money through banks basically and that’s not quite right.
“And if you look at big businesses, say Tesco for example, it doesn’t always have to go to RBS, or whoever they bank with, it can go to equity markets, it can issue bonds, it’s got the capital markets. But small businesses have no capital markets, they have no other way of raising finance, and historically that’s always been the case because transaction sizes are smaller so banks can’t run a capital market for small businesses.
“But we thought, why can’t we open up an online marketplace where all different types of investors can lend money to businesses?”
Last year, venture capital-backed Funding Circle, which offers unsecured and secured loans, property loans and large asset finance loans, enabled £50m worth of lending, making around a 3 per cent fee, with a recorded turnover of £2.02m. Funding Circle is not profitable yet, but a spokesman said this is the result of “a conscious decision” to use money raised from funding rounds - £13m to date - to invest back into the business.
Firms eligible to raise finance through Funding Circle must have at least two years’ filed accounts with Companies House, a minimum turnover of £100,000 and a good credit history. If a company passes the credit assessment process, it goes on to the online marketplace and prospective investors place bids. Only the lowest interest rate offers are chosen and the business can choose whether or not to accept.
But how competitive are its interest rates? “Our average interest rate is about 8.9 per cent, so all of that interest goes to the investor and we charge on average a 3 per cent fee, so in terms of an APR you’re talking between 10 and 11 per cent. Now sometimes that can be a lot better than the bank and sometimes it can be a bit worse,” said Mr Meekings.
“Most often it is the case that we are cheaper, but we don’t position ourselves like that, we position ourselves as a quicker and easier way to get finance than going to the bank. And if business owners think of the biggest cost when they raise finance, it’s actually, in my view, going to the meetings all the time to see the bank manager.
“With us you come on to the website, you fill it out in half an hour and you get a decision, you don’t have to go and see the bank five times. You go and see the bank five times and you miss out on customers.”
Funding Circle, which employs 54 people, up from 17 a year ago, will be regulated, along with other peer-to-peer lenders, from April 2014, by the UK’s new market regulator the Financial Conduct Authority. “Regulation is something we really welcome”, said Mr Meekings. “It is very important we treat all our consumers and businesses fairly,” he added. “There’s also other benefits like unregulated financial products can’t advertise on broadcast media.”
Peer-to-peer lenders and crowdfunding providers have argued that rules tailored to more traditional markets are holding back the development of a vital source of finance. But even if this is the case, the sector appears to be expanding. Mr Meekings predicts that this year alone it will see “huge growth”.
Factfile: James Meekings
Title: Co-founder and director at Funding Circle.
Date of birth: 08/03/1983.
Lives: Clapham, London.
Education: Degree in economics and management from Oxford University.
First job: Management consultant.
Favourite song: Galvanize by The Chemical Brothers.
Car driven: I don’t have a car.
Favourite film: The Shawshank Redemption.
Favourite holiday destination: Italy.
Last book read: The Steve Jobs biography.
Most proud of: Starting the Funding Circle alongside the other co-founders, Samir Desai and Andrew Mullinger.