Funding Circle urged to tighten lending criteria to small businesses

Small businesses that find borrowing money hard will find it even harder, as Funding Circle restricts credit

Funding Circle, the peer-to-peer lending platform, has been urged to tighten criteria to small businesses in order to ward off the threat of bad debts.

City analyst Helal Miah of The Share Centre warned: “Tighter lending standards from the group are needed to prevent an unsustainable rise in bad debts, protect the business and counter previous criticism.”

Funding Circle has halved its revenue growth projection to 20pc following poor demand for its loans. Chief executive Samir Desai said that “the uncertain economic environment has reduced demand from small businesses and led us to proactively tighten lending criteria”.

That said, Funding Circle is still growing at a fairly rapid pace with loans under management rising by 37pc to £3.5bn.

The P2P lender increased the amount of cash it lends to SMEs by 23pc to £644m in the first three months of this year. Of this, £419m went to British SMEs alone.

The average Funding Circle loan is £75,000 and the average borrower is a business that employs eight people.

Shrinking demand

However, demand from SMEs for business loans has shrunk given the headwinds from Brexit.

According to the Q2 Small Business Index published by the Federation of Small Business only one in seven (14pc) of small firms are applying for new credit – a figure largely unchanged over the past two years, despite increasing awareness of alternative finance. Fewer than one in five (15pc) of those small businesses that have successfully applied for credit are using new finance to expand their firms. And more than four in 10 (43pc) small firms describe new credit as “unaffordable”.

Funding Circle announced in April that it was closing its separate publicly quoted SME fund and returning capital to shareholders. The idea was that the listed fund would allow individual investors to invest in a portfolio of Funding Circle’s small business loans.

The company has yet to turn a profit, but Funding Circle said it expected the annual loss for 2019 to be lower than in 2018.

“We remain confident in our aim to become the world’s largest small business loans provider, helping millions of businesses to create jobs and support economic growth,” Desai said.

Peer-to-peer lending is coming under increasing scrutiny from regulators and investors. In June, the Financial Conduct Authority announced plans to limit the amount private investors could put into peer-to-peer lending firms.

In May, Barclays business banking CEO Ian Rand told Growth Business that he feared the growing P2P SME lending market could see a Wonga-style collapse if fintech lending criteria are not rigorous enough.

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