Strapped businesses are increasingly turning to peer-to-peer lending platforms such as Lending Club in the U.S. and Funding Circle in the UK rather than banks or traditional investors for loans. They are having no trouble finding money: with interest rates languishing at historic lows people have little financial incentive to park their money inside savings accounts, so the promise of healthy returns on P2P platforms is proving appealing.
And how. Lending Club is predicting that it will originate close to $2 billion in loans this year. “We’re starting to be at the size of some of the U.S. banks but we’re growing a lot faster. We’re tripling each year,” says Renaud Laplanche, founder and CEO of San Francisco-based Lending Club, a scheduled speaker at Le Web London, a conference to be held on June 5th and 6th that attracts the global digerati.
In early May, Google and Foundation Capital had taken a $125 million stake in the company, giving Lending Club a valuation of $1.55 billion, triple that of 2012. “We’re really establishing a better way to borrow money for consumers and a credible alternative to the banking system,” says Laplanche.
Although the sector still pales in comparison with bank lending to small and medium-sized firms, worldwide crowdfunding volumes reached $2.66 billion in 2012, up from $1.47 billion the previous year, according to a survey by Massolution, a research and advisory firm specializing in the sector. That followed growth of 64% in 2011.
Massolution is predicting $5.1 billion will be raised via crowdfunding platforms in 2013, with a greater shift towards funding new businesses and small firms rather than social projects, which are currently the most popular category.
Many websites now offer small investors the opportunity to earn interest from lending money to either individuals or small businesses, while others allow people to invest in companies in return for an equity stake.
Laplanche says Google’s involvement with Lending Club serves as a validation of its accomplishments so far and sets the stage for further innovation. “Both Google and Lending Club have a history of using technology and innovation to bring more transparency and lower cost into the industries that we disintermediate,” says Laplanche. “We have plans to work with Google on new products that we can’t talk about yet, but that we’re hoping will be very impactful in terms of continuing to transform the consumer credit industry in the U.S.”
Both Laplanche and Samir Desai, co-founder of the UK-based platform Funding Circle, eschew the term ‘crowdfunding,’ explaining that their services are better understood as credit marketplaces where businesses seeking capital can find investment from people willing to loan money for the promise of a return.
While sites like Zopa and Ratesetter have thrived by loaning to individuals and Lending Club lends both to individuals and to businesses, Funding Circle, a UK-based P2P lending platform, only handles loans to businesses.
“The way it works with Funding Circle is you lend as little as £20 to each business and we generally advise that people build a portfolio of at least 100 loans so with about £2,000 you can build a portfolio of these loans,” explains Desai, another scheduled speaker at Le Web London. The typical net return is about 6.5% after fees and losses.” The idea is the same as with venture capital and angel investing: although some of these businesses will go bad, as long you spread your money across lots of different businesses you should still come out ahead.
Funding Circle launched in August 2010 and has so far lent over £103 million to businesses. “About £10 million of that has come in the last 30 days so that gives you an idea of the kind of acceleration and how fast the business is growing,” Desai said during a recent interview with Informilo.
Funding Circle’s backers include Index Ventures, Union Square Ventures and a series of prominent angel investors including Alan Morgan, former head of McKinsey & Co.’s Financial Services in the UK, Europe and the Middle East; Charles Dunstone, co-founder of The Carphone Warehouse; Ed Wray, co-founder of Betfair; and Sam Lababidi, co-founder of Playfish.
In December the UK government announced it would lend £20 million to small businesses through Funding Circle. “It’s actually the first time the government has ever lent money over the Internet directly to businesses,” says Desai. “It’s very forward thinking of them.”
Gaining not just the buy-in but the participation of the government is just one more sign of how crowdsourced loans are rebooting lending.