If the banks say ‘no’, social investing could be the answer.
Those looking around for alternatives to the low interest rates in high street savings accounts right now may want to look at a new investment business offering returns of between six and nine per cent.
Funding Circle – a new type of ‘social lender’ – is launching this summer and it will follow a similar model to that of the better-known Zopa exchange, where the company acts as a platform for investors wanting to lend their money for a return on their initial investment.
Funding Circle will differ, however, in that it lends to established businesses – both limited companies and sole traders.
Businesses will be able to borrow between £5 and £50,000 and investors can lend anything between £20 and £2,000 per business – although it is recommended that investors spread their risk across as many businesses as possible.
The company is expecting considerable interest from both investors and borrowers as high street cash spreads are currently very wide. Savers are continuing to find it difficult to secure decent interest rates, while business borrowers face steep interest rates to gain business loans.
James Meekings, co-founder of Funding Circle, says that the final part of the technology for the online systems is still being built, with a view to launching later in the summer.
He explains: ‘We think it is an exciting way of getting a financial return, with returns of around 6 to 9 per cent. And if you look at business lending as a market, bank rates range from 6 to 18 per cent for unsecured loans. There will be a lot [of banks] watching this market with interest. ‘
Our research shows that people really want to support small businesses in the UK as small businesses represent a really important part of the country’s economy.’
Investors should consider social lending to businesses
Meekings says that investors should consider social lending to businesses as being ‘on a par’ with corporate bonds in terms of risk, but stresses that social lending is very much an asset class in its own right.
Those in any doubt about the quality of borrower that the business may attract should look at the tight parameters set out by Funding Circle.
The company has no desire to attract businesses looking for start-up funding and its credit-scoring process seems to be just as strict as its successful industry peer Zopa.
Meekings explains: ‘We only want high credit quality business and we make that absolutely clear. Defaults will be very much in line with Zopa levels. We have strict minimum criteria for borrowing.
‘We then screen the business so that only a small proportion of applicants will get onto the platform. That process is very similar to personal lending but we will have information on the income of a business too.
‘The smaller a business, the more scoring goes on the directors of that business, so when the business information gets thinner it becomes more about personal lending.’ For a longer version of the this article, vist What Investment.