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Funding Circle to restrict some loans to instutional investors
Funding Circle announced they will be offering what they refer to as "whole loans". These are loans that will be offered to institutional investors rather than lenders on the current Funding Circle platform.
We were well aware that institutional investors are interested in peer-to-peer lending, and while we are hugely supportive of Funding Circle and what they have achieved, we view this as a backward step as it places institutional investors on a different footing from retail lenders.
The rational behind this is probably two fold. Firstly as Funding Circle look to grow their business they need ever more lender capital, and while retail lenders are increasing both in number and funds invested, this may be insufficient to meet Funding Circle's growth targets. Secondly, a large injection of new lending capital would also reduce lending rates, which have risen over the last couple of months, possibly to the point where loans are starting to be less competitive from the borrower's perspective.
I would argue that a better solution would be for institutional investors to be able to bid, automatically if required, in chunks of several thousand pounds. The comments on the Funding Circle forum and the Independent forum have also expressed some concerns with the current Funding Circle proposal.
Here is the statement from Funding Circle:
It’s been a fantastic start to the year at Funding Circle. The announcement of additional funding by the Government-backed British Business Bank and the introduction of regulation by the FCA helped to drive a record quarter of lending, with more than £53 million lent to small businesses across the UK – more than two and a half times the amount during the same period of 2013.
At Funding Circle our goal is to build a better financial world by helping as many businesses as possible to access finance, and investors to earn attractive returns.
Over the last few months you will have seen an increase in lending opportunities with record levels of demand from businesses across the UK. Within the next 12 months we expect demand to increase substantially, and our aim over the next few years is to grow to become a significant part of the small business lending market. In the UK, this is an estimated £7.5bn per month market.
To achieve this we want to ensure we have a diverse range of investors at Funding Circle. More investors helps us to attract more businesses, as we have seen from the Government’s involvement. This helps to deliver more lending opportunities for everyone and ensures long-term stability and sustainability for the Funding Circle marketplace.
As you will probably be aware, we have mentioned before that there is a lot of interest from organisations, such as pension funds, insurance companies, family offices and hedge funds, to join Funding Circle to lend.
We have been considering the best way to introduce these new types of investors to the marketplace in a way that is sustainable and also protects the experience of individual investors.
As part of our considerations we have closely followed the developments of the US peer-to-peer lending market over the last 18 months, where larger investors have purchased whole loans rather than lots of individual loan parts. This has shown to us that introducing the ability for investors to buy whole loans is a successful way of creating more lending opportunities for everyone, whilst also protecting individual investors’ Funding Circle experience.
Today we’re announcing that from early May we will be starting a one month ‘whole loans’ trial with a small group of non-bank financial institutions who will lend up to £3m in total. These whole loans will be purchased in full and it will not be possible for individual loan parts to be purchased, as is the case with the ‘partial loans’ that are listed today.
Initially, this will be a closed trial and last for one month beginning 1st May. During the trial whole loans will not be visible on the marketplace; however we will continue to publish details of every loan in our loan book and clearly indicate whether a loan is a whole loan or a partial loan.
While we anticipate most investors will continue to prefer lending on partial loans, once the trial has been successfully completed we will make whole loans available to any interested investors. You can register your interest after the trial by contacting us at [email address removed].
Today’s news does not mean individual investors will become any less important to us. Helping individuals earn attractive returns by backing British businesses is in the DNA of Funding Circle. It is something we are very proud of and will remain a core part of the business as we grow.
For more information about today’s news, visit our FAQs or join us on our forum where we will be discussing this in more detail. You can also read more here about how whole loans have worked in the US.
We hope that Funding Circle will reconsider these plans in light of the feedback from lenders.