Funding Circle Set To Fly
Peer-to-peer lending looks set to reach a significant milestone, with Funding Circle, one of the sector’s oldest offspring, readying itself for an IPO that will raise £300 million at a valuation of £1.65 billion. In one word, wow!
This is hugely exciting news for the company and for fintech, especially in the UK. Other significant fundraises are planned across the industry, with Monzo looking to join the ‘unicorn club’. A decade of hard work, risk taking and development is about to be rewarded.
Funding Circle’s success feels a little different. In some respects, it’s less of a fintech, more of a financial services company. It employed a revenue-generating business model from day one, applying tech to the business lending market that had been dominated for decades by slow-moving incumbents. Its success is a national success too. Its growth reflects how start ups and SMEs, those that use Funding Circle, have been allowed to build, test and grow throughout the last decade in a business-friendly environment.
Since 2010, Funding Circle has facilitated over £5 billion in loans for over 50,000 companies, creating a huge number of jobs in the process. It’s the UK’s biggest small business lender and it plans to use the raised funds to increase marketing and fuel its U.S. expansion. In spite of its achievements, it’s far from finished. As regulation slows conventional lenders, unconventional methods – such as peer-to-peer, crowdfunding or invoice financing – will grow more attractive.
Peer-to-peer lending and Funding Circle were forged in the fires of the financial crisis and boosted by the stagnant conditions that followed. Back then, banks all-but-refused to lend to SMEs. Other funding sources emerged, as innovation through technology offered new options to business owners seeking cash. Funding Circle saw their opportunity.
Peer-to-peer pools retail lenders, who loan funds to businesses in return for attractive rates of interest. The model’s popularity amongst business owners and investors has led Funding Circle to sit amongst the largest financial institutions in the U.K.’s £85 billion business lending market. CEO Samir Desai says: “We did more lending than the entire UK banking system combined in Q2.” Sensibly, they’re raising from a position of strength. Hence, the valuation.
Sure, £1.65 billion looks rich at 14x revenue, but we should admire their optimism. The offering will be a good test of public appetite for this sort of raise. Other fintech founders will be watching closely. The war chest will be put to work in the U.S., which will be tough to crack as it is already a mature P2P market. The biggest player on that side of the pond, Lending Club, should act as a cautionary tale for Funding Circle, drifting 75% down from the value of its 2014 public offering.
It’s also fair to say that they are wise to be raising funds at the top of a business cycle. As the sector is aware, peer-to-peer has grown in an environment of cheap money, aided by growth across the entire fintech sector. The first true test will come when the next downturn hits. This will test the resilience of individual companies and the strength of the sector’s model.
No one can predict the next downturn, but with the BoE nudging up rates and markets here and in the U.S. nearing the end of a decade-long bull run, it’s reasonable to think that a correction of sorts might be approaching. Regulation in the peer-to-peer sector also looks set to tighten in the near term, so that shift could be another test of Funding Circle’s optimism, too.
Since 2010, we’ve enjoyed some of the most benign credit conditions in recent history. Central banks have been an ever-present backstop and a next-to-zero rate environment has forced market participants to chase yield far and wide. For Funding Circle, the growth of the UK SME sector has been rocket fuel for its business, too. A downturn would slow all parts of it’s pipeline, so it will be fascinating to see how things shape up when the economy gets rocky.
However, if their IPO goes to plan and they put down roots in the US, Funding Circle will have a solid foundation, enabling it to overcome bumps in the road, be they regulatory or cyclical. Whether they achieve global domination or not, the Funding Circle team, and all involved in UK fintech should be very proud of their achievements so far.