Savers' site offers business lifeline

IT HAS been said that every crisis presents an opportunity and for savers and small businesses the lending crunch of the last three years has been a black cloud in desperate need of a silver lining.

A year and a half after the Bank of England base rate reached a record low of 0.5 per cent, savers continue to be starved of returns on their deposits. With inflation staying stubbornly around the 3 per cent mark, the only savings products paying real returns require savers to tie their money up for at least three years.

Meanwhile the problem for small businesses is in securing finance. Bank lending to businesses has fallen for five consecutive months, the Bank of England revealed last week, with small and medium-sized firms bearing the brunt of a continued reluctance among financial institutions to loosen the purse strings.

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However one new service claims to address both problems. Funding Circle ( allows savers to lend to businesses needing finance in return for an interest rate above that available on the high street. The site is similar to social lending service Zopa, which introduces individual lenders to people seeking loans (see box for more).

The money is lent for a period of either one or three years and businesses pay their lenders a fixed return each month, comprised of the repayment and a level of interest more competitive than they can currently secure from financial institutions.

The site launched on 13 August and by the end of September had funded 14 loans worth 320,000 for 11 businesses while providing savers with an average return of 8.8 per cent.

Samir Desai, co-founder and director of Funding Circle, said: "The site rose out of the ashes of the credit crunch, as it became apparent that while the lending market was increasingly restricted, particularly for smaller businesses, savers were struggling to secure real returns on their deposits."

The most obvious risk to lenders is of a company going bust. However that is minimised by their loan being spread across different businesses, with a maximum of 5 per cent exposure to one business.

"There are different risk bands, although all companies are vetted by experienced underwriters," said Desai. "We have had to turn away some businesses, as they need to have at least two years of filed accounts. We don't accept start-ups."

The accepted businesses are allocated one of three risk bands, with A+ borrowers considered the lowest risk, A borrowers low-risk and B merely below average risk. The rates offered by lenders typically rise with the level of risk. Funding Circle claims default levels will reach a maximum of 2.3 per cent, at the B level, with a failure rate of 0.6 per cent among firms in the A band.

However it is vital for savers to understand that the site is not a financial institution.So, while it is regulated by the Office of Fair Trading, it is not regulated by the Financial Services Authority, which means that in the event of Funding Circle going bust savers are not protected under the Financial Services Compensation Scheme.

Desai said the firm had sought to compensate for that.

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"The borrowers are all limited companies and we get personal guarantees from the directors over the loans, while we have arranged with a Standard & Poor's rated firm to step into our shoes if we cease to trade, so savers have two layers of protection," he explained.

Savers have so far invested varying amounts of between 400 and 70,000, although it's possible to lend as little as 20 to one business.

"Lenders can set the term they are looking for," said Desai. "Half leave their money to be automatically spread across different businesses, but others look at the information on businesses, such as their credit records and background, and select specific firms to which they can lend."

Some businesses allow lenders to see their name and details so they can take an interest in its progress, making it comparable to being a shareholder. Savers choose how much they lend to each business and at what rate of interest and the loan is listed on the site for two weeks to give the borrower time to meet their overall target. If that target is met the borrower picks the lowest interest rate offers, much in the same way as a seller would choose the best offer on eBay, so the business can try to get the best rate possible.

Desai is particularly keen to stress the fact that savers can access their money before the end of the term by selling their pot to other lenders, using the Autosale function. It currently takes between five and 10 days to sell the loan.

There are currently no fees but a 1 per cent annual fee for lenders will be introduced next year, while businesses will soon be asked to pay an application fee of 50, to be refunded when a loan is accepted, and a completed fee of 2 per cent of the total sum borrowed.

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