Why marketplace lending is good for small business
On May 13, 2015, our co-founder Sam Hodges delivered live testimony to the House Small Business Committee on Capitol Hill about the rise of marketplace lending, or peer-to-peer lending, and its potential to help small businesses find faster and more affordable funding. Here are his remarks:
Congressional Committee Remarks: May 13, 2015
Mr. Chairman, Ranking Member Velazquez, and Members of the Committee. I am Sam Hodges, co-founder of Funding Circle, and a small business owner. I’m here to talk about how peer-to-peer lending, also known as marketplace lending, is playing a vital role in delivering capital for great small businesses all across the country, filling the gap left as many banks have pulled back from this important segment.
Before starting Funding Circle, my partners and I were very much like the aspiring entrepreneurs and hard-working small business owners in your districts. We built up a chain of fitness centers all across the country. As we pushed to open new locations, we found that even with strong traction we were repeatedly denied the loans that would help us grow. That experience informed our decision to launch Funding Circle, as a better way for small businesses to get loans.
Founded in 2010, Funding Circle is the leading global marketplace lender dedicated to small business. Since then we’ve helped over 8,000 small business owners obtain over $1 billion dollars in loans. We currently lend $75 million dollars per month to a wide range of small businesses in both the US and the UK– from a logistics business in the Midwest, to an education services company in suburban Atlanta, to a multi-unit salad company in San Francisco, we are helping the 28 million small businesses in the United States gain access to the capital they need to grow and expand.
“Our loans address the core of the small business credit gap: term loans of $25,000 to $500,000 that a small business owner can use to expand her store front, open a new location, hire more staff, or launch a new product.”
Not only are our loans delivered quickly and in a highly-transparent fashion, they are also fairly priced, with interest rates typically in the mid-single digits through the mid-teens, with payments spread over a one to five year term. Today, if you ask the average small business owner whether they have the credit access they need to expand, there’s a very good chance that the answer you will hear will be a resounding “no.” Even as our economy recovers, and despite attempts such as the JOBS Act meant to ease the flow of capital to smaller firms, many small businesses are unable to access credit– we think that Funding Circle and other platforms like ours can be a meaningful part of solution to this problem.
To give you a sense of how this works: Funding Circle and other marketplace lenders are electronic marketplaces, which function by matching the supply of capital with borrower demand. On one side of the market are small businesses seeking loans; on the other are a mix of individual and institutional investors looking for a good way to invest their capital. We as the platform provide a transparent, data rich environment which allows investors to determine how they want to invest. This year we anticipate lending over $1 billion dollars through this model, and we think that we are just starting to scratch the surface in addressing the small business credit gap.
“Without access to term capital, small businesses commonly enter into costly, short-term credit arrangements with lenders who oftentimes charge APRs between 50 and 100%.”
For example, a small business may take a cash advance in exchange for allowing a lender to deduct a portion of its credit card sales, in what is generally called a “merchant cash advance.” While appropriate in certain circumstances – for example, funding inventory purchases – such short-term and high-rate products can also lead small businesses to use short-term financing to cover longer-term funding needs. These two attributes – short durations and very high effective rates – drive many small businesses into downward cycles of re-borrowing in which they take out more and more debt to roll over their repayment obligations. We frequently see the damage these arrangements can inflict on small businesses – otherwise healthy companies are throttled by overwhelming and unexpected debt service requirements. If this issue sounds familiar, that’s because it is: consumers historically have faced similar issues in payday lending and regulators rightly linked high rates of default and re-borrowing in payday lending to consumer debt traps.
In response to this trend, Funding Circle is committed to working with other marketplace lenders, other responsible credit providers and small business advocates to promulgate effective industry standards for non-bank small business financing.
While we expect these standards to cover a broad spectrum of practices, transparency around pricing stands out as a particularly important focal point. At Funding Circle, we prominently disclose total and periodic costs of the loans we offer in an easy-to-understand format, including our interest rate as well as our fee. With this information, a small business owner can evaluate the true cost of credit and make an informed decision. In contrast, many other lenders quote financing costs as a factor rate or buy rate and refuse to provide an annualized interest rate. In addition, they often charge hidden fees, and many advertise “no prepayment penalty” even when prepayment would not reduce the total amount owed by the borrower, including all future interest payments!
In contrast, the very transparency of the marketplace lending model helps ensure that only borrowers who should be able to repay take out loans.
“We believe that supporting marketplace lending represents a critical opportunity for policymakers to help improve small business owners’ access to affordable credit.”
At Funding Circle, we are striving to build a better financial world by crafting a transparent, market-driven approach that delivers much-needed capital to great small businesses all across the country. It is our strong belief that marketplace lending will be beneficial for these small business, for the investors putting their capital to work behind them, and for our country as a whole. Thank you for the opportunity to be here today, and for everything you’re doing on behalf of American small business.