Government to lend £20m through Funding Circle (peer-to-peer)

Small businesses often rely on bank loans for capital. However, small business loans have fallen over the past few years, in spite of the Government's efforts to encourage bank lending. Banks have become more and more reluctant to grant loans to small businesses that need them the most. In light of this, the Government has been exploring new ways of providing capital to small businesses independent of traditional lending institutions. In 2012, the Chancellor announced that £100 million in government funds was being allocated for investment in alternative financial services. Today it was announced that out of this £100 million, £20 million would be made available to businesses through Funding Circle, a peer-to-peer lending site. Peer-to-peer (often abbreviated as P2P) lending sites such as Funding Circle offer alternative financial services, made available through an online portal. Funding Circle allows would-be investors to invest directly in small businesses that require capital, without passing through traditional financial institutions. Businesses that wish to secure a loan submit an application to the site; lenders can then browse through the list of businesses that Funding Circle has marked as approved for lending. Each individual loan is not financed by one entity, but by many different lenders, each one lending a small percentage of the total amount. It is possible to have hundreds of different lenders funding one loan. Lenders bid with their interest rates and an amount in an auction competing for parts of each loan. Since 2010 Funding Circle has provided over £70 million in business loans to small and medium sized British businesses. Over the next two years, the Government's £20m in capital to small British businesses through Funding Circle will see them fund 20% of each loan, leaving the 80% for other investors. This model helps ensure that the Government's entry into the P2P lending industry will not have harmful effects on the balance between lenders and loans.  There will be no difference whatsoever in the way private investors fund loans. Through P2P lending sites like Funding Circle, the Government will be able to provide financing for businesses, without passing through traditional channels of financing such as banks. This may have the following positive effects:

• Increased revenue for the government.
• Small businesses will have access to a larger source of funding, which will stimulate the private sector and the economy.
• Banks, due to the increased competition in the lending industry, will be forced to offer more competitive rates, as well as increase their lending, which is good for businesses.

The Government expects to begin channelling funds to small business through Funding Circle early this year. If you are interested in getting a Funding Circle loan the Choice Loans would be happy to help. Please either call us on 01494 410125.