The shift from hierarchical models of resource allocation to more efficient marketplaces is occurring not only in handmade goods
or creative projects
, but in the provision of financial services as well. New digitally-native financial services that use technology in ways that directly benefit the customers of those services are emerging in areas ranging from personal finance and lending to trading and business lending. Many of these native services take the form of loosely coupled networks and marketplaces, which operate based upon the principle that transparent, real-time information flows enable users to get faster results and investors better returns.Funding Circle
, an online marketplace for the provision of loans to small businesses in the UK, is one of these new services. The Funding Circle marketplace connects thousands of businesses directly to thousands of lenders, thereby cutting out traditional banks and the high costs and long processing times associated with them. The marketplace operates in a transparent manner
- allowing investors to see in real time the prospective loans and the bids and rates on those, while borrowers can also see how investors are evaluating and pricing their debt and other activities in the marketplace. In the past 18 months, the Funding Circle marketplace has enabled over $45,000,000 of loans to almost 700 small business borrowers, with average yields for investors of 8.4%. It also has an active real-time secondary market - over $1,000,000 of 'loan parts' were traded in February alone.
Because Funding Circle is Internet-based, the transparency around data built into its lending marketplace has enabled it to build a sophisticated risk model for its lenders - one that utilizes a pool of borrowers that are qualified through rapid analysis of publicly available Internet credit and information databases. This enables borrowers to get rapid feedback on their credit prospects, and lenders appropriate returns while also managing their risk. Over time the company will use the Internet to extend this pool and manage the risk to lenders even further, through additional sources like borrower history on the platform and even more peer produced methods of rating credit.
Participants in the Funding Circle marketplace also help small businesses, the backbone of any economy, to grow and expand, while getting a great return. The UK government recently announced it will invest $160,000,000 in non-traditional lending channels that can reach smaller businesses, including peer to peer lending platforms.
We are excited to announce today that we are backing the Funding Circle team and participating in their Series B financing, along with Index Ventures
. We believe this approach of financing businesses - away from banks and towards a marketplace model - is powerful and more beneficial to all participants.