There are now more opportunities for investors to put their cash into non-limited businesses through peer-to-peer site Funding Circle. But what are the risks?
Funding Circle is changing the rules for lending through its site, no longer restricting it to limited companies.
Investors will now be able to invest in a range of sole traders and partnerships. The borrowers benefit from cheaper loans than the high street offers, and the borrower a healthy interest rate – of around 5%.
The first non-limited company to join up will be a family-run restaurant in Scotland, followed by a care home, a country pub, a coach hire business and a joinery firm.
These kinds of companies make up 70% of all businesses in the UK, but four in ten are refused credit from the banks, research from the Federation of Small Businesses has revealed.
The change means they will now be able to borrow between £25,000 and £1 million through Funding Circle. It also marks a huge expansion for Funding Circle which last week was rumoured to be starting a partnership with Santander.
[SPOTLIGHT]Lending levels are currently at historic lows from the banks in the UK. In the first quarter of 2013 lending fell by £300 million, despite the introduction of the Funding for Lending Scheme (FLS) last year. Therefore, it’s likely the move from Funding Circle will prove popular.
Peer-to-peer lenders
Since their inception more than £500 million has been lent through the three biggest peer-to-peer lenders - Zopa, Funding Circle and RateSetter - and this number is predicted to grow fivefold in the next three years.
The basic principle behind them is simple. Individuals lend to each other and cut out the middle man – the bank – making the whole thing cheaper.
The cost to businesses depends on the usual risk factors, such as credit history. On the website right now a loan of £20,000 paid back over three years would cost £22,901, which includes Funding Circle fees of £600.
Individuals can pick which businesses or traders they lend to. The more risky the borrower is deemed, the higher the interest rate on the loan.
What are the risks?
The number one catch with these lenders is that they aren’t yet regulated, so don't benefit from the protection of the Financial Services Compensation Scheme (FSCS). This means if they were to go bust your money wouldn’t be protected.
However, this regulation is coming and expected to be in place by next April. Until then most sites have measures in place to make sure any shortfalls are covered.