Are banks being crowded out?

THE LENDER

The grow­ing aware­ness of crowd­fund­ing is no flash in the pan, if lender Andrew Mullinger is to be believed.

The co-founder of Fund­ing Cir­cle, one of the UK’s promi­nent peer-to-peer lenders, is con­fi­dent that the amount lent in peer-to-peer loans (busi­ness and con­sumer) will dou­ble by the end of this year, increas­ing from £360 mil­lion in 2012 to more than £700 mil­lion.

“The British pub­lic is invest­ing its mon­ey direct­ly into the blood­stream of the British econ­o­my,” says Mr Mullinger.

Firms such as his, which oper­ate in the lend­ing sphere of crowd­fund­ing, have sought to fill the vac­u­um cre­at­ed by the ret­i­cence of tra­di­tion­al high street banks to lend to many busi­ness­es.

“At present 90 per cent of all lend­ing is con­duct­ed by the five main banks,” he explains. “It’s an incred­i­bly con­cen­trat­ed mar­ket and small-busi­ness own­ers have suf­fered as a result.”

Even if such banks deigned to return to sen­si­ble busi­ness lend­ing, Mr Mullinger argues that things could nev­er be the same again.

Crowd­fund­ing has sought to fill the vac­u­um cre­at­ed by the ret­i­cence of tra­di­tion­al high street banks to lend

“With the intro­duc­tion of new reg­u­la­tion rules, such as Basel III, banks can­not lend at the same lev­els they were pre­vi­ous­ly,” he says. “There­fore, new entrants are step­ping up to ensure busi­ness­es can access the finance they need to grow.”

Wor­ry­ing­ly, last year’s gov­ern­ment-backed Bree­don Report esti­mat­ed a fund­ing gap emerg­ing of £26 bil­lion to £59 bil­lion for busi­ness finance over the next five years.

With small-busi­ness lend­ing worth approx­i­mate­ly £70 bil­lion a year, Mr Mullinger believes Fund­ing Cir­cle could, over time, account for a sig­nif­i­cant pro­por­tion of this mar­ket.

At Fund­ing Cir­cle, the aver­age loan is made up of small invest­ments, as lit­tle as £20, from more than 500 dif­fer­ent peo­ple.

The aver­age busi­ness bor­row­ing through Fund­ing Cir­cle is 15 years old, employs about eight peo­ple and turns over between £100,000 and £40 mil­lion.

What’s in it for investors? Fund­ing Cir­cle is adver­tis­ing an aver­age gross yield of 8.9 per cent, mak­ing this area of crowd­fund­ing attrac­tive to savers fed up with ter­ri­ble rates of return brought on by record low inter­est rates and the knock-on effect of quan­ti­ta­tive eas­ing.

While aware­ness of crowd­fund­ing is increas­ing, there is not yet a robust reg­u­la­to­ry frame­work around the sec­tor to pro­tect bor­row­ers and investors. Despite this, Mr Mullinger stress­es that busi­ness own­ers who become involved in crowd­fund­ing are quick­ly con­vinced of the mod­el.

“Once a busi­ness bor­rows through us, they tell us they won’t go back to their bank for a loan,” he says.

THE ENTREPRENEUR

Ser­i­al entre­pre­neur Bar­ry James, who co-authored an Infor­ma­tion Commissioner’s report on IT secu­ri­ty for small and medi­um-sized enter­pris­es (SMEs) in 2010, is evan­gel­i­cal about crowd­fund­ing.

He is so con­fi­dent that crowd­fund­ing is here to stay that he has just staged the UK’s first nation­al con­fer­ence on the sub­ject. The fact that such diverse stake­hold­ers as ven­ture busi­ness angels, plat­form providers and gov­ern­ment met to dis­cuss the bur­geon­ing sec­tor sug­gests that crowd­fund­ing is a major, sus­tain­able devel­op­ment in busi­ness finance, he says.

Mr James sees crowd­fund­ing as a busi­ness finance alter­na­tive for per­fect­ly viable busi­ness­es that don’t fit the mould.

Var­i­ous forms of crowd­fund­ing each have their own sell­ing points and so will appeal to dif­fer­ent peo­ple. For him, crowdlend­ing is just like bank lend­ing – with­out the bank.

“The upside is you’re like­ly to get a ‘deci­sion’ more quick­ly,” he says. “The­o­ret­i­cal­ly, the down­side is that the loans are often trad­ed and so you won’t know who you might owe the mon­ey to. But is that prac­ti­cal­ly a prob­lem?”

Mr James sees crowdlend­ing as a way to help exist­ing SMEs move into a new area or prod­uct. Crowd­in­vestors are more moti­vat­ed by propo­si­tion and objec­tive than any­thing else, he argues. “They are peo­ple who like the idea of tak­ing a risk on a start-up and also don’t like to go through bro­kers.”

Pre­sales and rewards-based crowd­fund­ing will con­tin­ue to be the largest of the three crowd­fund­ing forms, he says. It is pop­u­lar with the arts and third sec­tor as well as start-ups and is like­ly to con­tin­ue to grow. “It’s pop­u­lar because you’re not giv­ing away any equi­ty and you don’t have loans to pay.”

In his opin­ion, the main dri­ver for crowd­fund­ing – putting aside the nec­es­sary tech­no­log­i­cal infra­struc­ture – has been social media. “As social media has risen from the web and inter­net, crowd­fund­ing has risen from social media,” he explains.

“Busi­ness­es can build a trans­par­ent rela­tion­ship with a com­mu­ni­ty or ‘tribe’.” For him, those famil­iar with social media are more like­ly to make moral and emo­tion­al con­nec­tions with oth­ers, whether back­ers or busi­ness­es.

And par­tic­i­pants are gen­er­al­ly will­ing to go with the flow while the busi­ness mod­el finds its feet. “Those involved in crowd­fund­ing have proved to be rel­a­tive­ly under­stand­ing and patient,” he says. “You’ll often find a ‘we’re all in this togeth­er’ feel­ing.”