As reported by Leasing Life last month, Funding Circle has relaunched its asset finance offering to provide a quicker service to clients. Brian Cantwell has a Q&A with James Lovett and David de Koning from Funding Circle to find out why it was needed and where they see their company’s asset finance product developing
What is the core of the asset finance developments at Funding Circle?
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Lovett: We’ve streamlined our process to compete with lenders and offer a straightforward way for brokers and businesses to access asset finance.
The application process will be simplified and the underwriting decisions will be made within 24 hours, as well as coming up with a simpler process for completing the transaction and paying the supplier of the asset promptly.
What brought this change and how long did the old process take?
Lovett: I suppose the old process would be a slightly longer underwriting – maybe 48 hours rather than 24 hours. The key point is flexible payouts being available when required – these were things we felt we couldn’t deliver as effectively and was one of the reasons why we weren’t attracting much asset finance business.
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By GlobalDataOne of the reasons we wanted to get into asset finance was to deliver for more of our customer’s needs, and offer them a broader range of products – we’ve recently introduced property lending for example. When I talk about customers I mean business, brokers, lenders and investors.
Is awareness your biggest obstacle?
Lovett: We’re aware that awareness in the SME world of alternative finance is quite limited, both in terms of P2P and also in the asset finance world. A lot of owners aren’t aware that asset finance is available to them in the form of HP and leasing. Initially we’re only doing hire purchase.
De Koning: Our research shows that people who know Funding Circle is less than 5%, so it’s a really small amount. What we’re trying to do now as we grow is bring on more tailored solution we know customers want and allow that to grow into the book.
You spoke about a more secured system?
De Koning: We launched with just unsecured loans, and now if we’re doing anything over £100-150k, it will be secured, either through an asset or an asset agreement. Then there is property, and then anything under that amount is just secured on a director’s personal guarantee.
Lovett: So I suppose historically the main Funding Circle offering has been an unsecured business loan to be used for whatever reason – working capital or a range or reasons. When we’re talking asset finance, we’re talking specifically about a hire purchase product where we own the asset on behalf of the lenders and retain the asset’s security.
Within asset finance is there a market you relate to?
Lovett: Small-ticket business, initially focused on assets which retain some tangible value; I suppose you’d call them hard assets, where there is the possibility of repossessing it and the asset retains some value.
As we grow, we’ll look to expand on that to include a range of other assets. Our roots, in terms of offering unsecured loans to businesses, means we should be able to be very flexible about asset type and loan-to-value ratio. We’re very good at assessing the credit-worthiness of the business as well as factoring the asset security available.
How was risk split between investors and people taking loans?
Lovett: The way we manage risk is we have an underwriting team in the same way as any other lender, which assesses every deal that comes through. We obviously do all the credit searches with credit reference agencies; we have our own credit model and it’s very data-driven, but we also have people looking at every deal and making a decision on every deal.
Before we put it on the marketplace, we’ll assess the credit and then when it goes on the marketplace the lenders have the ability to do their own due diligence if they want to; some choose to, some choose just to bid.
Any plans to move into Europe?
Lovett: It is something we’re considering. We’ve always said these types of marketplaces work internationally, and the US business is about a year old now and has gone from $500k to about $5m lending a month, so big growth, and we’re not expecting that to slow down.
So if the asset finance sector has it’s ‘feet on the ground’ in the US, is it launching properly in the UK?
Lovett: The US business product is still unsecured lending right now. They’re not really looking at asset finance yet, although it’s something that could be on the horizon.
De Koning: The challenge for us in the UK has been that we have a lot of businesses coming to us looking for money, and our job really is to try and structure the deal in the best possible way for all parties. What we haven’t done previously is we haven’t structured in the best possible route for asset finance.
We have done some in the UK just as James said; it’s been small-ticket, small sizes, not really a significant part of the business. If we can get this product right over the coming months, then there’s a big opportunity both here and the US. But our view is it has to be a slow and steady growth.
Lovett: And also we have to do it right and we’re managing risk appropriately etc. So it’ll be a slow start but we’re looking to grow.
Is the idea here to set up a forum for people to lend?
Lovett: We’ve always seen Funding Circle as a marketplace. This means we want the broadest range of products available for businesses, be that loans, asset finance and so on. Coupled with that, we want the deepest supply of capital as well and a diverse mix of investors. There are 30,000 individuals lending money through the platform, but we won’t have the UK government lending £40m in our system for example. We do have 10 local councils, and universities and so on, but on modest amounts. I think you’ll see more of this diversity of capital over the coming years, which really enables us to scale to the point where actually any type of lender could use the platform to lend. We’ve already partnered with Santander and I expect you’ll see more partnerships like that over the coming months. This enables Funding Circle to operate as the marketplace and be agnostic.
P2P is sometimes seen as a bit of a threat to asset finance. Is this the case?
Lovett: We’re a challenger in an incumbent’s world. We talk a lot about our acceleration because we think that’s our future, but we don’t think we’re going to replace NatWest. They offer a range of products we don’t. On more specific things such as particular asset finance players, we have to get the product right, but being a tech-driven business is a fundamental competitive advantage to us. We can do things more efficiently and quicker and we don’t have a number of offices dotted around the country, so we can keep overheads low, which means our costing will always be competitive.
Is there a mix between people who like a face-to-face service and younger people who can access finance through their phones?
Lovett: There is a real mix and one of the reasons why brokers work for us is they have those relationships with clients directly, and they meet them, and they have that very close relationship. We can broadly sell as both and brokers are very important, and we think we add a lot to the broker market.
If you look at a broker now, they might have a relationship with 10-15 lenders. We’re potentially giving them access to a market with 30,000-plus individual investors lending anything from £100 to £50m-plus on our marketplace.
We’re giving them potentially a diverse range of lenders.
I remember you saying something about the alternative platform for lenders. What level of enthusiasm do you have for this?
Lovett: The consultation going on at the moment is genuinely heartening and the level of appetite in the government to support new alternative lenders is very impressive. There’s been a lot of support trying to get the bank mechanism working for small businesses over the past few years, but actually what the government has realised is that the new wave of lenders such as ourselves offer the greatest opportunity and scope to provide real competition in the market.
Our view is we welcome a referral scheme that mandates passing on leads which should be done as early as possible; signposting businesses to alternatives at the earliest possible stage is going to be the most useful system. If you refer businesses solely when they receive a rejection letter or something like that it will diminish the impact of the alternative lender system.
The partnership we have with Santander is a prime example of how in the private sector we can achieve this system. We certainly feel there’s no reason why we can’t have partnerships with multiple banks across the UK. As long as the thinking is about putting the customer first I think there’s a great opportunity.
