Is there a social alternative to business bank lending?
Funding from the banks for business loans remains constrained with few loans approved and high interest rates for those who do get through the application process. As a result, affordable finance for business continues to be frustratingly hard to come by, even for companies with good credit ratings.
Social lending organisations work by allowing individuals - and now businesses - to get loans at a low rate using money from savers who invest their money into the scheme. In March 2005 Zopa was launched as the first online person-to-person marketplace in the world. Perhaps as a logical extension of that model, Funding Circle was established in August 2010, to offer the same model to small businesses seeking business loans. With funding for business still hard to come by and rates for business loans high, this new scheme could offer some small businesses a lifeline.
Funding Circle follows in the footsteps of Zopa, which was established in 2005 as the world's first person-to-person online lending marketplace. With Zopa individuals can borrow, but Funding Circle is the first social lending format to make it possible for businesses to access the invested money.
Before being able to borrow, businesses are credit checked and underwriters assess the companies in the same way a bank does to ensure only low risk companies are allowed through. They are then put in a risk band and are listed on the site for two weeks. A loan can typically be provided in around three weeks, compared to between six and eight weeks for the banks to set up a loan. The speed of the turnaround is another attraction for businesses needing to get hold of finance quickly.
The popularity of social lending is growing and while it is far from a mainstream way to borrow or invest money, increasing numbers of individuals and now businesses are using them.
The attraction for both borrower and lender is simple - better interest rates than the banks. Most borrowers can secure a loan at a far cheaper rate than any bank, reducing the cost of a loan by around 20-30%. It's also possible to get the money much more quickly, in just 2-3 weeks rather than the 6-8 week wait for a bank loan. That makes business loans more affordable and more accessible during these tricky economic times.
In the first ten weeks Funding Circle was able to lend 1m to 35 businesses via the investment from its initial 1,600 members. With an average interest rate of 8.2%, it compares well to the 12% typically charged by banks for a business loan. The average loan was 30,000.
Tempted savers should remember that these social lending schemes do not come under the government's Financial Services Compensation Scheme which, with an ordinary savings account in a British institution, protects up to 50,000 for each saver per bank or building society.
Article Source: FxTradingStock.com
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Visit Funding Circle for a easier alternative to business banking
by: Gordon Shepard
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Word Count: 482
Date: Fri, 26 Nov 2010
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