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A Few Minutes With… Sam Hodges, Co-Founder and U.S. Managing Director of Funding Circle

Sam Hodges Headshot

Tell us a little bit about Funding Circle. What is Funding Circle in a nutshell?

Funding Circle is the leading global marketplace for small business loans. We connect creditworthy small businesses who want to borrow with accredited investors and institutions who want to lend. Using technology to cut out the middleman, we can connect supply directly with demand for a fraction of the cost, creating a transparent marketplace that gives small businesses access to fast and affordable financing and investors the opportunity to invest in a new fixed income product. Since launching in 2010, Funding Circle has helped 35,000 investors lend almost $1 billion to 8,000 small businesses globally.

What inspired you to found Funding Circle? What did you do before?

Over the past few decades, but particularly since the financial crisis, banks have largely pulled out of small business lending due to tighter regulations, high origination costs and archaic credit models and technology that make it difficult for them to profitably underwrite small business loans. This has left millions of small business owners without access to the financing they need to grow, hire more people and ultimately stimulate their local economies.

This was a pain-point I saw first-hand: along with a few partners, we started and built up a network of successful fitness businesses. Despite having great financial characteristics, it was virtually impossible to get a loan for that business – we talked to almost one hundred different lenders and were either turned down or offered terms that simply didn’t make sense. The irony was, when my co-founder and I were working in on Wall Street, we saw bankers lining up around the corner to give out $100 million loans for higher-risk businesses. That’s when we realized the American banking system was broken, and we set out to build a better solution.

There are a lot of different players in the P2P lending space. What makes Funding Circle different from other marketplace lenders working with accredited investors?

Unlike the other major marketplace lenders in the US, our focus at Funding Circle has never wavered from helping small businesses, the lifeblood of our economy, secure funding to grow. We’ve carved out a very unique niche for ourselves and have been built from the ground up to underwrite and lend solely to small businesses; lending to consumers is very different from what we do.

Another key element that sets us apart is our holistic approach to underwriting. Unlike some other marketplaces that only rely on computers to make credit decisions, we use human judgment supported by innovative technology and proprietary data analytics in our underwriting to better assess the creditworthiness of a loan. Our term loans are also secured in two ways – business and personal assets. As a result of this approach, we are able to offer a range of different investment offerings that are very attractive to many accredited investors seeking yield.

For an accredited investor, what are some of the benefits of investing via Funding Circle?

Many of the benefits of investing through the Funding Circle marketplace are also what sets us apart from other marketplace lenders working with accredited investors.

To begin, Funding Circle is the only major marketplace lender in the US that allows accredited investors to invest in secured small business term loans – a traditionally hard to access asset class. Second, all of our loans are prescreened and assigned a risk rating and coupon rate (ranging from 5.99% to 20.99%) by seasoned credit professional using proprietary data analytics. We only lend to established businesses that have operating history, cash flow and a strategic plan for growth. Third, all of our loans are secured by a borrower’s personal and business assets; we file a UCC against the assets of each small business borrower.

Finally, our marketplace was designed to offer transparency and control to investors who want to diversify their portfolios by investing actively or passively across a number of successful businesses looking for growth capital. Investors can access our marketplace with a minimum opening balance of $50,000 and a minimum investment per note of $1,000. Investors receive access to loan-level data from across the loan book, and can either browse the marketplace and select individual investments or set criteria and invest automatically. Our secured term loans range in term from one to five years.

How does Funding Circle plan to keep moving forward in this space?

The most powerful marketplaces bring together the largest number and diversity of participants across a breadth of products and geographies. Our goal is to be the leading global marketplace for the full gamut of small business loan products worldwide. Over the next few years, we will continue to spread the word about the benefits marketplace lending and invest heavily in technology and talent to help us continue to build a transparent, sustainable and diverse marketplace.

On the investor side, this means focusing on further diversifying the breadth and depth of capital flowing onto the platform. We already have an incredible diversity on our platform, from retail investors in the UK and accredited investors here in the US to some of the most sophisticated pools of institutional capital in the world investing across both geographies. For borrowers, this means continuing to bring down our cost of capital so we can offer even better rates and products.

Where do you see Funding Circle a couple years down the road?

We’re on the brink of the largest financial services revolution the world has ever seen. Small businesses are underserved in every market by banks, and so we’re building a better solution. Our aim is to be the leading global marketplace for small business loan products. For borrowers, this means creating a truly transparent marketplace where they can access fast, affordable and fair financing to grow their businesses. For investors, this means creating a diverse platform where one day investors will be able to buy $10m in Indian SME loans on Monday and then co-invest with UK retail investors in Australian LOCs on Tuesday.

Partnerships with existing lenders will be an important way for this industry to reach its full potential, and looking forward, we believe banks will prefer to put their SME loans through our platform. We were the first fintech company to announce a formal referral partnership with Santander and have since announced a similar one with RBS in the UK. We hope these partnerships act as a blueprint for other banks here in the US.

So, in sum, we see Funding Circle becoming the world’s leading marketplace for small business credit. This will mean a great way for small businesses to access appropriate credit products in a highly convenient and transparent format; for investors this will mean the ability to build a diversified portfolio of investments in great small business loans.

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