A U.K. Peer-to-Peer Lender Wants U.S. Businesses to Forget Banks

Funding Circle, a peer-to-peer lending site that has made more than $250 million in loans to U.K. small businesses since 2010, is coming to the U.S. The idea is to connect individuals and institutions willing to lend with businesses that don’t qualify for bank loans and are hesitant to take on more expensive types of alternative financing.

To make that possible on a national scale, Funding Circle’s chief executive officer, Samir Desai, is merging his company with Endurance Lending Network, a San Francisco startup that has been making peer-to-peer loans to small businesses since last year. He also said Funding Circle closed a $37 million funding round led by venture capital firm Accel Partners. Endurance co-founder Sam Hodges, who will help lead Funding Circle USA, expects the merged company to lend tens of millions of dollars in the U.S. in 2014.

In the U.K., borrowers on Funding Circle typically pay interest rates between 6 percent and 12 percent on loans ranging from £5,000 to £1 million (about $8,000 to $1.6 million), as well as origination fees of 2 percent to 4 percent. Desai expects interest rates in the U.S. to be slightly higher.

Peer-to-peer lending, in which individual or institutional lenders fund loans over a third-party platform, has been mostly a consumer affair in the U.S., where San Francisco’s LendingClub expects to make $2 billion in personal loans this year.

That’s starting to change. LendingClub has signaled that it will begin making small business loans in 2014. Startups such as Endurance and San Diego-based Dealstruck have begun making small business loans, but without achieving the volumes that Funding Circle has in the U.K. Another U.S. startup, SoMoLend, is foundering following an investigation by Ohio’s securities regulator.

So far, the party line among peer-to-peer lenders is that they’re not in competition with each other. “The real competition is banks,” says Desai. Dealstruck founder Ethan Senturia concurs. “By entering the U.S., Funding Circle brings validation that peer-to-peer lending can be an effective option,” he writes in an e-mail.

The news of Funding Circle’s expansion came Wednesday, hours after the Securities and Exchange Commission proposed rules for equity crowdfunding, which would allow private companies to sell shares to mom-and-pop investors. When those rules are finalized, they will likely allow peer-to-peer lenders to fund loans with investments from the general public. For now, only accredited investors—institutions and wealthy individuals—can invest in Funding Circle’s loans.

Like any other kind of lending product, peer-to-peer lending will appeal to a wide swath of small business owners only if “they can get a decent amount for a decent price,” says Rohit Arora, CEO of Biz2Credit, which connects borrowers and lenders for business loans. For that to happen, the company will have to attract small businesses that investors see as good credit risks.