When it comes to small business lending Funding Circle is the
largest online marketplace, at least when it comes to traditional
term loans. They are the largest small business lending platform in
the UK and the first multi-national online lending platform,
operating in both the UK and the US. Our guest for episode 38 is
Sam Hodges, the co-founder of Funding Circle USA, who is
shepherding his company through a period of rapid growth.
In this podcast you will learn:
The origins of Funding Circle USA.
The loan terms and range of interest rates Funding Circle
charges.
The typical small business borrower at Funding Circle.
How they market to find small business borrowers.
Their current loan volume in the US.
The plans for making their US loan history publicly available
as they do in the UK.
How the fractional marketplace operates and who is
investing.
What kind of security that Funding Circle takes with every
loan.
The overall returns for investors in their small business
loans.
How their default rates have been trending.
Their recovery rates when a loan goes bad.
The kind of information on each business provided to
investors.
The details of their own fund that invests in the fractional
marketplace.
Sam’s thought on the recent House Small Business Committee
hearing.
An explanation of the regulatory framework that Funding Circle
operates in on both the borrower and investor sides.
The Funding Circle approach to dealing with regulators.
What they are doing when it comes to self-regulation for the
industry.
What the next couple of years will look like at Funding Circle
and where they might expand to next.
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Peter Renton: Welcome to the Lend Academy
Podcast Episode number 38. This is your host, Peter Renton, founder
of Lend Academy.
[music]
Peter: Today on the show, I am delighted to
welcome Sam Hodges. He is the Managing Director and Co-Founder of
Funding Circle USA. Now, Funding Circle is really the leading
global marketplace for small business loans and they have been
around in the US for a couple of years and based in the UK where
they started about five years ago. So I wanted to get Sam on the
show. We actually were together in Washington, D.C. testifying in
front of Congress a couple of weeks ago. I’m going to talk to him a
little bit about that, but also just to get an update on Funding
Circle, they launched their fractional marketplace a few months ago
and I wanted to get some information about that and about the
traction they’re getting and the returns they are able to produce
for investors. Hope you enjoy the show!
Peter:Welcome to the podcast, Sam.
Sam Hodges: Thanks for having me on the show.
Peter: Okay, so let’s just get started with
telling everybody a bit of background about yourself.
Sam: So I’m Sam Hodges, I co-founded and run
the US business for Funding Circle and I’ve been doing that for the
past four years. As many of the listeners probably know, Funding
Circle is the world’s leading marketplace lender focused on small
business loans. Since we got founded, we lent out about a billion
dollars to great small businesses across the US and the UK.
Peter: Okay, let’s give the listeners a bit
of a background about how Funding Circle USA actually came to be.
When we first met, you were Endurance Lending so just explain how
you morphed from Endurance Lending to Funding Circle USA.
Sam: So my co-founder and I in the US had
originally started a business called Endurance Lending Network. The
reason we started that company is actually very much based on our
experience as small business owners ourselves, those of us who
worked in a variety of different traditional finance and technology
roles, but then had the experience of building up a successful
network of fitness businesses all across the country. Gyms that
actually still exist today, but the kind of crazy thing was despite
the traction we have in that business, it was really hard to get a
loan. The more we kind of scrapped at that problem, the more we
realized it’s really a structural gap between where banks can leave
off and where other lenders play. What that means is there’s a
whole category of small businesses who are underserved so we
started Endurance Funding Network in the summer of 2011, built it
up organically from then until the summer of 2013. During that
period of time had gotten to know the folks at Funding Circle
really well, Samir, Andrew and James being the three main founders
over there and to make a long story short, saw a lot of strategic
fit between the two businesses and so that summer, summer of 2013,
we decided to put the businesses together and that has been
operating under the Funding Circle name since then. The great news
is of the folks we had at Endurance, when we combined the
companies, a vast majority are still with us today with us today so
overall, it’s been a very successful business combination.
Peter: Yes, I imagine. So those gyms that you
started, did you sell that company or is it…..you, obviously,
didn’t put any more effort into it, I imagine, once this took
off.
Sam: (laughs) I assuredly don’t have time to do it
day to day, but the good news is one of my partners in that
business is able to run it day to day so it still exists, they’re
still going, still quite successful and actually expanding, which
is great to say.
Peter: Cool, I guess they know where to go if they
want a loan, right? (laughs)
Sam:That they do.
Peter: So just talk about your loans a bit. These
are term loans, you don’t deal with the short term kind of loans at
all….tell us about sort of the range of interest rates and typical
loan amounts and that sort of thing.
Sam: Our focus is on delivering a loan that solves
the problem we had as small business owners, which is the need for
expansion capital. There are lots of different solutions out there
if you need a very short term, smaller dollar, high rate loan. But
if what you really need is the type of loan that banks did 20 or 30
years ago, there aren’t that many options out there.
So a Funding Circle loan is a loan that is priced between 6 and
about 21%, it’s an amortizing term loan where payments are spread
out over one to five years. These loans are fully secured, both by
the assets of the business, and also personal guarantee. So what
that means is, for the best borrowers, ones who are the most credit
worthy with traction, they’re getting a very fairly priced, very
low rate loan, one that’s directly comparable to what they might be
able to get from a bank, but we also have loans for businesses that
perhaps have had a bit more challenges or simply they’re just
businesses that are a bit early on and therefore, where there’s a
bit more risk.
Peter:Okay, so then so you do like one up to
five…..is the average around three years?
Sam: That’s right, the average term is about three
years and the typical use of funds…..I should say the average loan
size is about $125,000 and the typical use of funds is for a
business who’s looking to do something like expand a storefront or
open a new location or buy equipment and hire employees in advance
of being able to grow so there are broad uses of different funds,
but really geared very much around expansion.
Peter: Okay, and so when you talk about small
business, obviously, there is a huge variety of companies out
there, can you tell us some of the verticals you’re in and if you
have a focus on a couple of specific niches.
Sam: We’ve a really diversified set of small
businesses we’ve been able to serve ranging from a multi-unit Salad
company in San Francisco to a health care services business in
suburban Atlanta, to a logistics company in the Midwest. You know,
borrowers really represent the full range of great small businesses
that are found across the country. We’ve made loans in all 50
states, we do operate the platform nationally and no one category
of borrowers takes up more than about 15% or so of our overall
book. So really what we look for in the types of businesses we lend
to are the ones with strong cash flow, strong revenue traction and
growth and a viable need around how they do, again, expansion
capital.
Peter: Are you still doing……I know when you
started off, you really were focused on the franchise market, is
that still a good market for you guys?
Sam: Franchise market remains a really interesting
market for us. We established 40 different franchise partnerships,
partnerships with names like Papa Johns where if you’re an
established franchisee looking to expand, we actually are the
preferred lender to many of those networks. So, definitely, it’s a
category we still really like, that being said at this point, it
accounts for a minority of the origination that we do simply
because we’ve seen a kind of broad-based opportunity beyond the
franchise space and we’ve been able to grow the business and now,
again, can serve a wide diversity of small businesses.
Peter:Right, right and where do you find the
borrowers? I know you’ve got sales people on staff, do you work
with brokers a lot as well, what are the main channels where you
find the small business owners looking to borrow money?
Sam: Absolutely, so the short answer is it’s a
really diversified set of acquisition channels through which we
find small business borrowers. On the direct marketing side, we do
a lot of direct mail, we also do a lot of digital advertising,
social and also affiliates and on the full partner side or kind of
the intermediated acquisition we have a pretty broad-base of full
partners. It’s certainly including loan brokers, SBA loan brokers
particularly equipment finance brokers, but then also businesses
like accountancies, regional accountancies or kind of sole practice
certified public accountants who are sending us their small
business customers when those customers that need financing.
Peter: Okay, okay, so then….you know, I was in
your office again just recently….I was in six months ago and you’re
growing tremendously just like a lot of the other companies in this
industry, but can you give the listeners some idea about
your….what’s your US loan volume right now?
Sam: Sure, in the US, we’re lending out about $15
Million a month. That number is one that’s growing quite quickly,
call it north of 10% month over month.
Peter: Okay, okay, and then one of the things that
the UK company has done and……I keep wondering when you guys are
going to do it is and that is giving the loan history and the data
over to investors. Is that on your road map and if so, when?
(laughs)
Sam: Short answer, it is. One of the foundational
principles of how we operate the marketplace is transparency;
transparency of the borrowers around what type of loan product
they’re getting and also transparency with investors around how
historical returns played out and also as much transparency as we
can offer in terms of what they’re actually investing in.
In the US, frankly the constraint at this point pretty much is
just technical, which is we’re trying to get the ability to
calculate real time portfolio returns and automate that so we don’t
have to ask too many employees, just kind of doing the data
management that keep our records up to date. You know, the worst
thing would be if we furnish data but then those data went stale so
providing real time available information on historical portfolio
absolutely is part of the plan and we’re going to do it as soon as
we have the product capacity to do that.
Peter: Okay, so investors coming on to your
platform today……..what sort of data do you provide, I mean, we
presume you have some large investors who would demand obviously
your complete loan book. That is something that you’re providing to
investors today?
Sam: That’s correct, we provide the loan book to
investors and we provide historical returns as of a point in time.
What we’re waiting on is just the ability to offer it in complete
real time up through wherever you stand today.
Peter: Okay, okay, fair enough. So you guys
released the fractional marketplace a few months ago. It’s the
first time people can invest in true small business loans on a
fractional basis, can you just describe to the listeners how that
fractional marketplace works, how it’s similar to Lending Club and
Prosper, how it’s different.
Sam:Sure, so we launched our fractional
marketplace because we thought that this investment product, the
ability to invest in small business loans would be a great one for
a pretty wide range of different accredited and institutional
investors as opposed to a whole loan marketplace which is dominated
by institutions, of course, due to the investment sizes. The
fractional marketplace allows investors to put as little as $1,000
into any particular loan.
What we’ve seen is actually a really strong interest despite the
fact that we’re just starting to gear up our marketing efforts
where hundreds of accredited investors have come and signed up and
gone through our accreditation process and are now actively
investing in those loans through us. So if you’re an accredited
investor and you’re looking for a great……you know, a new
alternative fixed income product, we certainly encourage folks to
check it out.
This product is in many ways similar to what you can get through
Prosper and Lending Club. The two big differences, of course, are
number one, as opposed to investing in unsecured consumer loans,
which is a majority for those platforms do, in our case you have
the ability to invest in secured business loans that’s different
from the underlying assets. The other big difference
is…unfortunately at this point, we have to keep it limited to
accredited investors so folks do need to meet certain minimum net
worth or minimum income standards in order for us to be able to
sell them this security product.
Peter: Okay, so let’s just go back to that secured
loans that you just mentioned there. How are you actually providing
that for investors? Do you require hard assets, do you require
personal guarantee, how are you actually securing the loan?
Sam: Every single loan we’ve done in the US has
two layers of security.
The first is a security filing or UCC filing on the business
assets itself and the second line of defense is a personal
guarantee. What that means is if one of these loans is going to go
bad, I mean, the business has failed, the individual needs to
basically decide not to pay us back out of what the assets are then
they also would need to choose to not pay out of their own personal
pocket rather to that extent that it went that far.
If you think about the way this is structured, it’s actually
quite typical to how a commercial bank would structure a loan
product for one of their borrowers. Because these loans are secured
this way, that’s what allows us to offer an effective cost of loan
or an interest rate to the borrower that’s very attractive and
fair, at the same time also being able to offer what should be very
stable returns to our investors.
Peter: Okay, so let’s talk about that a little
bit. I saw some….or I don’t whether it was a press release or what
it was, but came out in a couple of articles, they’re talking about
your returns today. Can you tell the listeners what the average
returns have been. You’ve been operating obviously for a few years
now so what are you providing?
Sam: Sure, so our investor returns in the
marketplace if you take the overall portfolio in the US over the
trailing 12 months has been north of 10%. Obviously, the actual
realized returns depend on which exact loans you hold and how
diversified your portfolio is, but based on where we’re pricing
these loans and based on some reasonable level of diversification,
we do expect many investors to be able to get returns at that order
which, of course, relative to other investment products that are
out there, we think it’s quite attractive.
Peter: Okay and so then what about defaults?
You’re doing quite a few loans, you must have seen at least, if not
defaults then loans that have gone into arrears. How has that been
going for you guys? Is it meeting your expectations and where are
you at?
Sam: Sure, our overall loss levels are broadly in
line with what we’ve projected. They came in a little bit higher
for the first half of 2014 than we expected, but starting with the
second half of 2014 and certainly this year to date, they’ve been
broadly in line with what our projections were. Our delinquency
rate and default rate in our current portfolio also is very much in
line. We’re talking about annualized loss level in the low single
digits, which, again, given where these loans are priced that leads
to attractive returns provided one’s portfolio is sufficiently
diversified.
Peter:So when you talk about losses there, are you
…you’ve taken security interest in the business… is that expected
losses, actual losses when you talk about low single digits and
you’re able to …..are you able to kind of get back some of the
assets from the businesses that are struggling?
Sam: Yes, in the case of loans that actually have
gone and defaulted, we have experienced and do expect to experience
some level of recovery. In the UK, for example, where we’ve got
about two years of additional recovery data where, frankly, we
expect the US portfolio to perform similarly. Our recovery rates
have been on the order of 30 or 40% so quite attractive. What that
means is if you’ve just think through the delinquency and default
math but then also compute that recovery rate that’s also very
supportive of attractive investor returns.
Peter: Right, right, okay, so then when someone’s
coming to sign up to your fractional marketplace, I mean, what are
you providing for the investors. Obviously, this is not anonymous,
I presume, or how……what are doing to make investors comfortable
that they understand and they can make a good judgment based on the
risk.
Sam: So what we provide to investors who are
investing in the fractional marketplace is a sufficient level of
financial granularity and kind of general characteristics of the
business itself, to make a very informed decision as to that type
of loan. Now the reality has been actually that most investors are
choosing to programmatically invest or do things like put money
into a fund product and I think the reason they do that is that
they’re really buying into the theme of diversification and what
they’re looking to do is try to get exposure to as many small
business loans as they possibly can or least as many small business
loans of type X as they possibly can. Again, given the credit risk
is somewhat idiosyncratic, that’s certainly something that we
encourage.
Peter: So on the fractional side you are not
providing the company name, is that correct?
Sam:That is correct
Peter: Okay, but on the whole loan side, are you
doing so?
Sam: We have to be very careful about what
information we offer because just from a compliance perspective,
you can’t co-mingle personally identifiable information with a lot
of the credit and financial information that investors use to make
their investment decisions. So, generally speaking, again, and in
order to be compliant with our regulatory standards, we do need to
be very careful about information like that.
Peter: Right, right, fair enough, and so then so
people can still invest in your fund today as well as the
fractional?
Sam: That’s right, so we rolled out what we call
the Funding Circle Diversified Income Fund about the same time that
we launched the fractional marketplace and that’s a product for
primarily high net worth individuals and family offices that’s got
a higher kind of investment minimum. It’s a way for them to get
programmatic diversification and also passed through benefits of
holding a fund structure.
Peter: So is that fund only investing in whole
loans or is it going to invest in the fractional as well?
Sam: That fund is only investing in
fractional.
Peter: Ah, okay, so if….that was my next
question….like if someone’s on the fractional marketplace and you
see the loan is 50% filled, does the fund come in and fill it, I
mean, and are all the loans being funded on the fractional?
Sam: Any loan that we list on fractional, we have
sufficient liquidity to not completely, but to in effect guarantee
that they get filled out. That being said, we’re not using the fund
to fill out a loan. Potentially, that could lead to adverse
selection for the fund. So, rather, what the fund does is
programmatically keep a minority piece of every single fractional
loan and then individual investors who are up on the marketplace
are basically filling up the rest.
Peter: Okay, so you sort of see how much demand,
what the available cash is in all the investors’ accounts, and you
think, okay, we’ll…….and you also for the programmatic ones you
know exactly what their criteria is so I guess you can make a
pretty good judgment call as to whether or not it’s going to be
filled.
Sam: That’s correct, so we, of course, don’t want
to send the loans to the fractional marketplace if there are not
enough people there to invest in them so we keep a very close watch
on how much investor appetite there is and what we try to do is
send out the right number of loans so people can quickly diversify
and build a diverse portfolio while at the same time making sure
that the loans don’t break.
Peter:Okay fair enough. I want to switch gears a
little bit and talk about regulation. We were both on the panel in
front of the small business committee in Washington, D.C. a couple
of weeks ago, I just wanted to get your thoughts on how you thought
about how the whole testimony went and the attitudes of the members
of the committee.
Sam: So we were very honored to be asked to
participate on the panel and felt really good about the fact that
the House Small Business Committee is obviously now taking the
marketplace or peer-to-peer lending very seriously as a way for
small businesses to access the capital they need to expand and
grow. I thought that the number of questions overall were very well
informed and I think they were very balanced. They spoke both about
the real value and potential that this approach has in terms of
meeting their small businesses capital needs.
At the same time, also were sensitive to potential conflicts or
concerns that these models weren’t developed in a really mature
way. You know, half the panel, I had a chance to connect with a
number of members one-on-one and what we felt at least was a very
high degree of enthusiasm around the potential here, again,
provided we and the other platforms who are kind of developing the
sector do so in a responsible way.
Peter: Yeah, I felt that too. I felt like there
was some restrained enthusiasm, shall we say, from some of the
politicians there. It was good that they wanted to learn more so
what I’d like to do is….if you could explain now in less than ten
minutes the regulatory framework that you operate now on both the
borrower and the investor side, what federal and state licenses and
laws are in play for Funding Circle.
Sam: So on the borrower side or on the side which
we make loans, were regulated primarily by the state, we also have
to be compliant with federal lending statutes particularly the
Equal Credit Opportunity Act and Fair Credit Reporting Act, but
most of the licensure we need and most of the parameters we follow
in terms of making loans, again, is a state issue or credit kind of
question. So what we’ve done is put together a regulatory framework
that allows us to operate nationally which is something we are very
proud of and took quite a bit of work to achieve, but we think it
is the right way of going about it so that this business is set up
properly.
On the other side, on the capital formation side, it depends on
whether you’re speaking of our whole loan marketplace or the
fractional marketplace. The whole loan marketplace isn’t a
securities business, it’s considered a type of commercial lending
activity where we originate the loan and then, in effect, sell that
loan through to a whole loan investor who is interested in
purchasing it.
The fractional marketplace is a securities offering where it is,
in fact, structured as a securities offering. We use a
broker/dealer to manage the fractionalization of the sale of those
securities so we have a broker/dealer, we have licensed staff, a
broker/dealer that’s a FINRA member and by extension the SEC is the
primary federal regulator that we need to make sure we’re on the
good side of. In addition to that, of course, as with any
securities offering there are also state level laws or what you
call Blue Sky Laws that govern exactly how you manage the offering,
what disclosures you need to do, what filings you need to do and so
forth.
Peter: Okay, so then on both sides of the
marketplace are you available to all 50 states?
Sam: We are although on the investor side it’s a
bit more challenging because some states are very onerous in terms
of what you need to do in order to market an offering so when I say
conceptually that’s the case, practically speaking, there are
certain states that are a bit more challenging than others.
Peter: Right because you’re not doing general
solicitation, is that correct?
Sam: No, we are doing general solicitation so
we’re doing what’s considered a Reg D private offering under Rule
506c so we are generally soliciting and we’re just very carefully
going through and actually accrediting any investor who wants to
participate so that’s kind of the burden of proof on us as the
broker/dealer manager and, in fact, the people who are managing the
issuance of those securities.
Peter: Okay, so some states, are doing general
solicitation and some states still have issues with like
approaching accredited investors, is that what you’re saying?
Sam: That’s the short of it and even beyond the
solicitation piece, the other trick is any securities filings you
need to do. So if you want to go into more detail, I guess I can
get some of our legal team on the call, but the short of it is
because there’s that overlapping regulatory framework with some
federal securities rules, but then also a set of state level
securities rules you need to be very careful not only how you
market securities offering, also how you do the accreditation and
also how you do disclosure in any filings in state associated with
that securities offering.
Peter: Right, if you’re a consumer lending
business most of the consumer lenders partner with a bank to
actually originate the loan, but on the small business side sounds
like you guys are originating the loan directly, is that correct?
You’re not partnering with a bank?
Sam: That’s correct so in states where we need to
be licensed, we are licensed or in the process of being licensed, I
should say, the point being we stay within the kind of statutory
requirement in state in order to be setup as a commercial lender.
In some states you’re allowed to make up to X number of loans
before having to become licensed. Those are the states where we’re
just now going through that process as we ramp our lending
activities. In states like California where we got started, we are
a licensed lender. We actually have two California lending
licenses, one that supports our whole loan business and the other
that supports our fractional marketplace.
Peter: Okay.
Sam: I guess that aside, the short answer to the
question is yes, we are doing the lending directly under our own
licenses. One big difference between consumer lending and
commercial lending is the state level lending rules are just
sufficiently different that as a national lender they are state by
state, provided that you stay under the state level usury cap. One
of the advantages that we have given the part of the market we’re
playing is our loans are priced pretty fairly, like I said in a
fashion that in general is under usury cap so in certain states
that have lower usury cap we may not be able to offer a particular
risk tier and that’s of course fine in order to be compliant, but
in most states we got a lot of freedom to operate.
Peter: Okay, so at our hearing a couple of weeks
ago, we had in the audience…..I’m sure you chatted with them, there
was the regulatory affairs people from Lending Club and OnDeck were
both in attendance, what’s your approach to dealing with
Washington, D.C.? Are you going to take a proactive approach kind
of like those two companies?
Sam: Yeah, our plan is to take a very proactive
engaged stance vis-a-vis our regulators and potential regulators at
a state and federal level. We think it’s really important just as
we’re very transparent with our borrowers and with our investors
and that we’re also, frankly, transparent with our regulators. In
many corners of the small business lending market, you do see
practices that we think are borderline abusive and they certainly
concern us and it’s important that we and other responsible lenders
kind of band together and at the very least engage in pretty good
self-regulation so we can draw a very clear line between what we’re
doing and what perhaps less scrupulous folks are doing in their
activities.
Peter: Right, you mentioned that a couple of times
in your testimony, the self-regulatory piece, seems like it’s
pretty important to you guys. What more can you say about it as far
as dealing, actually creating something that……whether it’s some
sort of trade body or something that is formalized in that
approach.
Sam: Yeah, these conversations are still in early
day so not yet in a place where we can say anything too formally,
but I guess what I’d say is we’ve been talking to a number of other
platforms who are also getting to scale and who also care a lot
about the future of the industry and are thinking about this in a
pretty long term way and what we collectively are trying to do is
figure out a framework that lays out how we want to operate these
businesses, things like disclosure standards around the price of
credit, you know, certain standards around how we work with
intermediaries and other folks who might market on our behalf.
Those are standards that I think are going to be really important
as marketplace lending becomes an ever increasing source of
financing for small businesses.
Peter: Okay, okay, fair enough. So today, you guys
are growing fast, where are you finding it more challenging to
grow? Is it on the investor side or the borrower side or are they
both in perfect balance right now?
Sam: (laughs) Well, as you probably know from
following this space, you’re never quite in perfect balance. I
guess what I’d say is we continue to see a really strong appetite
on both sides. You know, if anything, just given a couple of very
large institutional lending deals we’ve struck recently as well as
the success of our fractional marketplace, we are slightly more
borrower constrained than capital constrained and so we’re very
focused on ramping up our direct acquisition efforts as well as
solidifying great partners through whom we can find small
businesses.
Peter: So do you find, when you’re trying to ramp
up your borrower efforts, are you coming across……if you lose a
loan…obviously, you’re not going to gain every single prospect that
comes in the door, are you losing it to a traditional lender or are
you finding more and more that there’s other online lenders that
are in the game that are trying to undercut you or what have
you?
Sam: No, typically, when we lose a borrower,
actually the reason is the borrower has chosen not to move forward
with financing or they’ve gotten a loan from a bank at an extremely
low level. So for example if a small business has a chance to go
through kind of an SBA process and been at it for a couple of
months and they’ve got a great relationship with a commercial bank
and they’re able to get a term loan at 4.5 to 5%, we encourage
these small businesses to take that loan because right now, even
our lowest rates aren’t quite competitive with that even though on
the whole we’re very competitive where most bank loans come
out.
When we lose business to other kind of non-bank lenders, I guess
what I’d say is typically, it’s just because of the different view
on risk. We do see a couple of players occasionally taking on loans
with pricing that we don’t think make sense, but everyone has a
slightly different risk model so I’m sure they’d probably say the
same thing about us on the margin.
In terms of new entrants in the space, I wouldn’t say over the
last couple of years we’ve seen anyone particularly new come in and
surprise us at all. There are a handful of other marketplace
lenders who certainly are active and we bump into them,
particularly in our intermediated channels, with direct
acquisition. The good news is they’re typically….they have not ever
heard of marketplace lending or peer-to-peer lending and so we just
need to educate them on what we do and show them how it can be
potentially a very good fit with their capital needs.
Peter: Right, right, okay, so before I let you go,
one last question. Obviously, your goals are to get bigger and get
more volume going, but what else are you looking for Funding Circle
to do in the next year or two?
Sam: There are three major growth themes. The
first of which is just driving scale which is really around ramping
up our marketing efforts, improving our operational efficiencies so
we can create capacity and further automating many areas of the
business.
The second major theme is around product breadth. Right now, we
do, basically, A+ through what we call C risk tiers, but beyond I
think that there’s an ability to do safer loans and also
potentially move down the risk spectrum a little bit so we can
serve an entire share of the small businesses in need of credit.
Beyond those credit tiers though, there are also different
amortization structures and different loan product types that we
see a lot of appetite for. For example, there may be an appetite
for unsecured and a shorter term loan, we see an appetite for
equipment finance, we see an appetite for line of credit type
products and we’re in the process of exploring what we want to do
next as we widen the range of loans that we can do.
The third major theme is geographic expansion. As you know,
Funding Circle is very active in the US and the UK, but we see
opportunities across a lot of other small business markets all over
the world. So even as my day to day work remains 100% on making
sure that our operations in the US scale and we serve as many small
businesses as we possibly can….my colleagues in the UK who are also
thinking about where we can take this model next.
Peter: So you’re not going to give us a clue on
what countries are in the running. Is there a Funding Circle China
in the offering sometime soon?
Sam: (laughs) I don’t think China will be next. We
do see a lot of opportunity in Western Europe, Spain, Italy and
France are all markets that seem to have the structural
preconditions to potentially do what we do and potentially serve a
lot of great small businesses and also get a wide range of
investors involved. Nothing to announce there or no further
direction I can give at this point, but it is something that we’re
starting to look at more seriously.
Peter:Okay, well on that note I’d like to thank
you very much, Sam, for coming on the show,
Sam: It’s always a pleasure, thank you.
Peter:Okay, cheers. Bye.
One of the things that fascinate me about the small business
lending market, particularly when it comes to the online space is
it’s pretty wide open right now. You’ve got OnDeck who were the
first to go public and they’re certainly the largest online small
business lender today, but they’re focusing in a different area
than Funding Circle. I’m sure there’s a little overlap, but for the
most part they’re operating in totally different spaces.
As far as the term loan products, these three, four and
five-year loans, there’s no one that’s really dominating in this
country doing those kinds of loans. It’s the banks that have really
dominated and they don’t like doing the smaller loans and they are
losing customers to these online marketplaces so a company like
Funding Circle could very much become the leading brand in this
country and elsewhere for that matter around the world because
small business lending seems to be in high demand in many countries
not just in the US.
On that note, I’ll sign off. Before I do though, just one
request. If you’ve been listening to the show for a while, I
certainly appreciate that. I would appreciate it even more if you
would go to iTunes or Stitcher, wherever you’re listening to this
show, and give the Lend Academy podcast an honest review. I’d
really appreciate that and on that note I will catch you next time.
Bye.
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Podcast 38: Sam Hodges of Funding
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