Alternative Ways to Invest Your Money: Funding Circle

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What You Need to Know

  1. With more traditional investment vehicles failing to perform, people are turning towards new methods of generating returns on their capital.
  2. Funding Circle allows investors to link up directly with ventures in need of funds.
  3. Only businesses that pass the Credit Assessment Team’s vetting process can borrow through the service.
  4. All businesses are also given a ‘risk rating’ to help investors gauge their potential.
  5. Investors are able to spread risk by investing small amounts in a diverse range of ventures.
  6. Investors are able to offer their own rates on the money they put up.
  7. Investors are given access to a wide range of statistical information, including the performance of every loan ever arranged through the service.
  8. Other than a low percentage of your rates and sold debts, fees for using the service are charged annually.
  9. Funding Circle has it’s own debt collection agency in the event that a business misses any payments.

With traditional investments such as stocks and shares and even property failing to produce returns of any note and with savings accounts offering little more, growing numbers of cash-rich individuals are turning to a wide range of ‘alternative investments’ offering better returns, albeit often with higher-than-average degrees of uncertainty and risk.

Here’s our guide to several places you may want to put your money. First, here’s a look at Funding Circle;

What is Funding Circle?

Funding Circle describes itself as ‘an online marketplace to help businesses find low cost loans quickly and investors get better returns’. It was designed with the aim of cutting out the middleman and so allowing investors to put money into vetted and established UK businesses in need of funds.

How Does it Work?

Funding Circle sells itself on its simplicity, both for investors and businesses in need of investment.

  • All businesses that apply for funding are vetted thoroughly by a Credit Assessment Team. Only established businesses that pass the strict tests are able to borrow money through Funding Circle, giving investors confidence that they are investing in strong, creditworthy businesses.
  • All approved businesses are also given a risk category, from ‘Good’ to ‘Excellent’, giving investors greater choice. Once an investor has chosen what risk category they are happy to lend to, they will be able to see businesses asking for funding on the online ‘marketplace’.
  • Through the marketplace, investors can bid the amount of money they wish to lend and state the interest rate they want to earn.
  • Each investor puts small amounts of money into lots of different businesses, spreading their risk. In turn, businesses have hundreds of investors lending to them and, with only the lowest interest rates accepted, they are able to enjoy the best possible deal.
  • Funding Circle then manages monthly repayments from borrowers back to investors and also provides account management tools and regular reports.

Potential Benefits for Investors

Funding Circle promises potential investors a wide range of benefits, from ease of use, the ability to support new enterprises and, of course, solid financial returns.

1: Ease of Use

Funding Circle promises a range of benefits for investors, above all a good return on their investments with managed risk and extra transparency. That is, all fees, potential returns and terms and conditions are clearly outlined on the website, as are ‘transparent market statistics’, showing the performance of all the loans ever accepted by businesses through Funding Circle. Additionally, a dedicated statistics page also provides investors with as much or as little information about the performances of other loans at the click of a mouse button.

2: Rates and Fees

According to Funding Circle, its investors earn an average gross yield of 9.1 per cent. However, actual returns will vary according to who investors opt to lend to, how much they lend and at what rate, and also the level of risk attached to a business.

In terms of fees, Funding Circle aligns these to investors’ returns. That is, you will only pay a small percentage in fees to Funding Circle as and when you earn interest from businesses or when your loan parts are sold to other investors. Additionally, the following fees are also charged:

  • An annual servicing fee of one per cent. This is based on the amount outstanding on each loan and is collected for each loan part only if a borrower makes a payment to you each month.
  • A sale fee of 0.25 per cent based on the amount outstanding on each loan part you sell, and is collected if your loan part is sold.

3: Tools and Added Advantages

For time-short investors, Funding Circle offers a special ‘Autobid Tool’. This tool will find businesses that match your lending criteria (i.e. how much you want to lend, at which risk level etc) and lend money to them automatically. Additionally, the tool will also ensure you receive payments on your loan parts automatically and can even re-lend these returns to other new businesses based on your criteria.

5: Added Protection

If a businesses misses a payment owed to you, Funding Circle has its own professional collections agency that will chase them on your behalf.

Additionally, if a business ceases to trade, if the loan has a personal guarantee or if it has been granted to a non-limited partnership, Funding Circle Recoveries will pursue the unpaid amount due on your behalf. Alternatively, if the loan does not have a personal guarantee, Funding Circles will attempt to recover the maximum owed amount through the courts.

Potential Drawbacks of Funding Circle

Since Funding Circle doesn’t itself take deposits – again, it simply matches up investors and small businesses needing funds – it is not regulated by the Financial Services Authority. In theory, therefore, investors will not have access to the FSA’s Compensation Scheme, meaning they could lose all their money if a business goes under.

However, Funding Circle stresses that businesses are thoroughly vetted before being approved to be put forward to investors. Furthermore, Funding Circle also has an in-house recoveries service dedicated to guarding investors’ money.

Further Reading

Nick Nick

There's other organisations doing this as well. Bank to the Future, Funding Knight and are some of the newer players coming in. I've found it useful to have accounts with several of these guys, they're all slightly different and Funding Circle's lending rates are falling all the time as awareness increases. So good deal for businesses (borrowers) but not so for lenders!


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