Small Business

Small-Biz Talks: Funding Circle on Small Business Lending

There is a new set of players in the form of online P2P marketplaces like Funding Circle in the small-business lending space. We sat down with Bernardo Martinez, Managing Director of Funding Circle U.S. to ask him how Funding Circle is changing up the landscape and how he sees the market continuing to evolve.

Following the recent financial crisis, traditional lenders like banks entered a multi-year hiatus on small-business lending. There's a lot of speculation as to exactly why but we do know that the hole left by their exit was quickly filled by online lenders. These new lenders have not only made borrowing a lot easier by leveraging intuitive online platforms, but they're also lending to businesses that traditional lenders would not have lent to in the past. A business that might have once been seen as "too risky" by banks may now be seen as a prime borrower by one of these new online lenders.

With the rise of online lenders come marketplace lenders like Funding Circle, an online marketplace that connects borrowers with lenders. Borrowers list their loan requests on the platform, and investors or lenders then offer varying amounts of capital to meet their loans. In other words, the lenders for a single loan could be multiple organizations or one single one.

Small-business lending has quickly evolved in recent years and technology has a lot to do with it. Why do these online lenders lend to businesses that may seem risky to banks? Well, they claim that their technology infused approval processes are more accurate, allowing them to identify prime borrowers that don't fit the traditional mold. Does this actually work? Time will tell.

However, we can tell that lenders like Funding Circle are actually impacting the economy positively. We had the chance to speak with Bernardo Martinez, Managing Director of Funding Circle U.S. Given Funding Circle's impending IPO on the London Stock Exchange, Bernardo was certainly excited about Funding Circle's future.

This interview has been condensed and edited for clarity. If you're a small-business owner interested in sharing your funding story, tweet us at @ValuePenguin.

Bernardo, could you tell us a bit about your background?

Certainly! I joined Funding Circle about six months ago. I had been in the financial industry for 20-plus years. I started my career at Bank of America, where I spent almost seven years going through different areas of small business: small-business credit cards, small-business lending in general and so on... and also a little bit of payment. So I spent my time there at Bank of America, and then spent six years outside the United States managing American Express as an independent operator in a country in the Caribbean. Prior to joining Funding Circle, I spent almost three years with PayPal, leading the U.S. business-lending division… Which leads me to the position here with Funding Circle. So, an extensive background in financial services, but more specifically, in small business.

This study shows that Funding Circle has had a pretty measurable impact on the economy in the US. How did Oxford Economics come up with those findings?

It's a dual method, if you will. They surveyed customers, and they also used some anonymized data from us to really understand the impact of the borrowing we're talking about. So, the two methods led to the conclusion that at the end of 2017, all the lending activities we performed have created or sustained 28,000 or so jobs in the United States and created more than $2 billion in GDP. It's a very profound study for us, because at the end of the day, one of the things that makes us different from other players in the industry is we truly believe that what we're actually trying to do is more than just lending. We're trying to drive the engine of economics in the U.S. It's in our DNA.

It seems like on a day-to-day basis, Funding Circle operates at a very micro level, where you're assessing individual loans; but it's clear you've been able to makes strides at a macro level, where you're having a far bigger impact and affecting the economy in a positive manner. Is this going to translate into Funding Circle working with local governments since the platform clearly has a macro impact?

In certain parts of the world, we're working with governments. If you look at our UK business, the government, the British Business Bank, actually invests in our platform to provide capital to small-business owners. So, yes: We have done, I would not say exactly what you said, in terms of using the government to subsidize loans or things like that. But we have seen in the UK how the government is helping small businesses through our platform. We haven't done that in the U.S., but that's something we will always be open to start thinking through with state officials, as well as federal entities; to see if there are opportunities for us to serve as a conduit to facilitate lending, which we know will result in a more dynamic economy.

Is Funding Circle concerned with anecdotal news of banks coming back to small-business lending?

We like to see a dynamic market. We are glad to see the banks coming back in. I think what we're seeing on the back end, specifically, is they're actually trying to partner with companies like ours to really do this in a better way. What we provide is an expertise that they do not have, due to the fact that they basically moved away from this segment in the crisis. More importantly, they are focusing on other areas. What we know is that in order to be successful in this segment, the small-business segment, you really have to dedicate resources—from a people perspective, from a technology perspective—to be effective; and banks have other priorities. I think, what we're finding is more banks are open to partnering with alternative lenders to really expand their ability to work on the small-business side. An example of that is that, we have a partnership with INTRUST Bank. They started investing in the platform, they saw what we were able to provide to borrowers, and now we're doing marketing with them in the geographies they operate in. In my experience, banks will start looking for partners in that regard. We look forward to being the partner of choice, because we think we're unique when it comes to small business.

So they'll be indirectly lending, through say, Funding Circle, for example?

On the consumer side, the scales are very different. On the small-business side, which is what we are focusing on, I think there is probably more opportunity for banks to partner with players like ours to achieve scale and provide access to credit for customers. When it comes to consumers, it's very different values, and therefore I don't see the same opportunity. Or, I don't see the opportunity as clearly as in small business lending.

A strength of a P2P platform like Funding Circle's is that borrowers can have weaker credits. But what's a drawback?

Quick correction: I don't think we necessarily allow for borrowers with weaker credit. We really try to use data to drive a prime book of business. The result is a portfolio that a lot of banks would love to have. However, they just don't have the technology or resources to build it as well as we can. They have to split their resources between so many priorities, which is why they don't have the same capabilities that we do. Banks are worried about various consumer and commercial banking concerns outside of small business. We, on the other hand, have a huge focus on small businesses. That focus translates into a better ability to build a better book of business with diverse borrowers. This is why we sometimes accept those with lower credit scores—those businesses have another trait that leads us to believe they're still prime borrowers.

From a weakness perspective: At the end of the day, we are a marketplace lender, so we have to always strike a balance between borrowers and investors.We need to continue to find investors that have an appetite for all of the borrowers that are coming to us. But at the end, it's not any different than the kind of weakness that a bank has, and I think we're well-positioned to be in this space.

What's stopping banks from hiring out third-party IT shops like an IBM or Accenture and building out those technological capabilities that they're currently missing?

I think it's time. I worked with the one of the largest banks in the United States, and they were also one of the largest small-business lenders back between 2004 and 2009. Even they struggled with the small-business segment because they didn't know where to spend their time. They prioritize their biggest activities, and those prioritized activities go toward their larger consumer and commercial businesses rather than the small-business vertical. Even if they wanted to hire an outside party to build out those capabilities, you still need a lot of internal resources built out to properly execute a project like that.

Given how much attention is on Funding Circle right now, how do you plan on best taking advantage of the spotlight in order to further your mission of helping out small businesses?

Our mission is really to drive a better financial world. We're doing everything we can to continue to focus on small businesses; making sure we're continuing to double down on investments that we have planned in the next two to five years to make sure we continue to dominate in the United States, UK, and the other markets we're in; and really being able to maintain the leadership position that we have today. If you look at our leadership position in our key markets from a P2P perspective, we are the largest platform in each of the countries we operate in. We want to make sure that we maintain that leadership position.

How does Funding Circle deal with the lack of human interaction in the approval process?

Small business is a very different segment, and I think that is why, in the past, some people have failed to really do well; they don't recognize that it's different. When it comes back to automation and the human touch, I believe the way we're going to win in this segment is having a combination between humans and technology. What I mean by that is, leveraging the data as much as we can to make good decisions, fast decisions. But we truly believe that the small-business owners want to talk to someone. That's the reason why, even though you fill out our application online, we follow up to speak with you to make sure that you understand what you are trying to do, or what you are trying to use the money for, so we make a well-informed decision. And also to explain to you what you are responsible for, and make sure you understand our terms. We believe in connectivity. Also, apart from other lenders out there that typically do everything automated, we have a high degree of touch in our approval process. We truly believe that that combination of collecting data from the customer and having that good conversation with them in our process, leads to a much better outcome for them. Or, if you go to the bank, you can try to gather a hundred pages of documents to see if you can get an answer in two to four weeks.

What are your thoughts on the new OCC fintech charter?

Right now, we're using a state model approach. We already have licenses in different states, and that's how we operate in the 49 states we operate in. We see this charter as great news for the industry. As we learn more about the OCC charter, we'll take a look and see what is the right next step for us. Overall, it was a good thing from an industry perspective, that now companies have a path to have a different regulatory framework for an industry that is in the first stages, if you will.

When should a borrower go to a traditional lender, like a bank, and when should they go to a platform like Funding Circle?

I will say that we're trying to build something that competes with banks head-to-head. The way I think about it is, I'd like to see in the future when a small-business owner has a checklist of things they want to do, they have a checking account from a bank and a Funding Circle loan. That's the way I want to be in that space: At the end, when they think about financing, they should be thinking about Funding Circle.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.