I've been reading about Funding Circle in
this article in the Guardian (Funding Circle's home page also contains links to other news articles that have featured it). It's a new internet-based market that allows individuals to lend money to small businesses. So, it is similar to Zopa, which supports lending of money amongst individuals.
I've not tried it myself but am tempted... you just need a few hundred pounds to make available for loans, and your money gets divided amongst 20 different businesses, so as to spread the risk, and then the claim is that you make on average about 6% on your savings, as opposed to about 2-3% as you currently make in a savings account. Interesting features include: lenders can bid their interest rate, resulting in a trade-off in that if you set a higher rate, it may take longer for your funds to be accepted. You can also set up or join a "circle" (see the help centre) to specialise which businesses you lend to. If you want your money back, you have to sell your outstanding loans to another lender (I assume that effectively results in a penalty for early withdrawal). The system supports "autobid" which manages the division of your funds amongst distinct businesses, and recycles repayments into new loans so that your funds continue to earn interest. Finally, on the downside, my impression from reading the help page is that the tax treatment of income is not very lenient.
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It sounds very appealing and trendy (peer-to-peer), but if you take away the ability to have some fun by restricting your funding to "circles", how does it differ from a high-yield
(http://en.wikipedia.org/wiki/High-yield_debt),
or "junk" in investment jargon,
(http://www.investopedia.com/articles/02/052202.asp)
bond fund?
(http://www.morningstar.co.uk/uk/fundscreener/results.aspx?lang=en-GB&Category=EUCA000607&Universe=FOGBR$$ONS&CurrencyID=CU$$$$$GBP&InvestorType=0|1&FundOfFunds=0|1)
One possible answer may be that most small business do not have the financial muscle to issue a junk bond. So peer-to-peer may help them access (cheap) funding. But if they cannot get bank funding or issue a junk bond then they should perhaps be considered very risky indeed. Shouldn't they then have to pay significantly higher interest to compensate the lender for the risk taken? Perhaps the rates that the banks charge them are not so outrageous after all?
It would be great if peer-to-peer put some pressure on the banks to cut small businesses some slack, but it would be a pity if it was at the expense of the unsophisticated investors/savers who are not fully aware of the degree of risk they take when they lend to ephemeral businesses.
Hmm. Well, I would not want to risk a great deal of money on it, certainly. It's an idea that needs to be tried out for a few years. A central question is whether banks are making excessive profit on the cash they lend to small business, and so would be vulnerable to being undercut.
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