A Business Banking Rebellion

Once upon a time us grubby little Englanders regarded our banks as respectable, honest institutions. Pillars of society. Bank managers were respected and viewed with awe. Meeting one was usually regarded with a level of trepidation. A bit like  being called to see the headmaster or waiting to see the dentist.

Your money was safe in banks. They paid interest on your savings and charged appropriate rates for loans. They made a respectable profit on the difference.  They were seen as the basis for fair dealing and financial honesty thoughout the country.

Small businesses could go to them assured that their situation would be given fair consideration, even if "the interview" was a bit like an interrogation by Special Branch. But if you had a good  history you could get the money to expand your business. You could trust the banks.

How things change.

At the moment the small businesses requiring short term loans are being crucified. Even if they are offered loans they are often at extortionate rates of interest.

This reluctance to lend becomes a self fulfilling propecy. No loans mean businesses cannot expand or modernise. No expansion or modernisation means they lose market share. They become less viable.  As they are less viable they are even less likely to attract a loan. Eventually they go under or are taken over. Hey Presto. The bankers were right all along.

But there is hope.

Lenders and borrowers are rebelling against the tyranny of the banks.

The new revolutionary concept of Peer to Peer banking is storming ahead. This is where the "banker" acts like a facilitator or intermediary and does not actually hold the purse strings itself. Real, actual people are the lenders and they decide the rates.

Most of the development so far has been with enabling peer to peer lending to individuals. The main player in this market has been the highly successful firm ZOPA. Now the model has been extended into the business sector by a new company called Funding Circle.

Funding Circle is soley concerned with facilitating loans to small and medium sized businesses. They are in their infancy at then moment but the concept looks good. It works by letting individuals directly loan money directly to small businesses. Funding Circle is simply the intermediary

Small businesses needing cash can register to borrow money.

A single lender will make many very small loans (£20) to many businesses. A single credit checked borrower will have their loan constructed from many small lenders.

The interest rate is decided in exactly the same way as done at ZOPA. The lender decides what rate he wants to achieve and then the loan offer is contructed from the lowest offers. So if you offer to loan money at a ridiculously high rate you will have no takers, while the borrower is classified according to a credit rating so he will only be offered a loan from borrowers who will have adjusted their rate to take into account the credit risk. On any one borrower, a lender is only risking a small amount of money.

The end result is that businesses can achieve loans at significantly lower rates than offered by the banks while lenders (i.e. savers) get a return (that takes into account potential bad debt) which is at least twice that offered by the banks. You can, by the way lend as little as £500. This is not a scheme simply for the rich.

Before you ask, I have no financial or work interest with Funding Circle. That is other than that I have bunged in £500.00 to see what happens. So far I am very impressed.

If your small company needs a fair loan, have a look at Funding Circle. If you have some savings and you want to get a good return (and actually use your money to do something useful) then I recommend you look to become a lender. As well as that, in a small way you also get to screw the greedy banks.

Next (or soon)  I will be looking at the third very interesting leg of Peer to Peer banking with KIVA and the charity sector.