Funding Circle: Small Business Loans, Rates, & Fees Explained

Quite different from regular small business loan companies, who may issue funds from a central repository (like a bank), Funding Circle is a peer-to-peer (P2P) lending platform, which means that investors pay money into a pot and earn an annual return when others borrow from it.

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    Funding Circle US is one of four related operations worldwide that has financed nearly $11bn in business loans since its inception in 2010, creating 115,000 jobs worldwide for its 77,000 beneficiaries. The company operates out of the USA, UK, and two northern European countries, namely, the Netherlands and Germany. Funding Circle business loans are available in amounts up to $500,000, from a minimum of $25,000. Investors in the lender include major organizations like the British Business Bank, which has contributed £150m ($192m) to small business loans in the UK to date. The company is also the beau of the media, featuring in online newspaper Forbes, most notably for its business loan rates and efforts towards lending to small businesses. But what do customers and investors think of Funding Circle? And is it an avenue worth exploring for a fledgling company in need of a little cash upfront?

    What are Funding Circle Loans?

    The Funding Circle peer to peer lending model hinges on its investors' spare change and the amount the lender can return to those that pay into its loan pot. Funding Circle requires a minimum of a £2,000 deposit from first-time investors, which translates to £20 towards 100 different business loans. However, the average portfolio size is around £8,000 ($10.2k) for the UK arm of the company. For an investment of that size, lenders can expect a return of 7% scalable with risk. One reviewer with a self-measured 4/10 level of risk posted an annual return of 5.7% on his Funding Circle investment. 

    UK-based consumer watchdog Which? includes a claim in its Funding Circle review that nobody who met the criteria of lending to 100 different businesses has ever lost any of their money because of the endeavor. Outside of its novel P2P form of raising funds, Funding Circle acts like any other business lender, modeling its financial products on the popular Small Business Administration's 7(a) loans but with its own underwriting software. It's worth stressing here that the P2P side of Funding Circle's operation has nothing to do with its day-to-day lending at all, and customers are unlikely to be exposed to it. It's simply included here for completeness.

    How Funding Circle Works

    Offering a minimum of 4.99% APR (credit rating dependent), a Funding Circle loan offers a repayment period of between six months and five years. A typical applicant will complete an online application form, which, the company claims, can be completed in around six minutes, and speak to a personal loan specialist within an hour. With underwriting, paperwork, and other requirements taken care of, the entire Funding Circle lending process could be completed in one business day. 

    Much like the SBA 7(a) loans, recipients will pay a single monthly payment. There is, however, an origination fee to pay. To give an example, a company or sole-trader borrowing $50,000 over 24 months will pay an origination fee of $1,745, with a monthly payment of $2,250. In total, our hypothetical business person will have to pay back $55,739 ($3,994 in interest). Funding Circle can also provide special loans to minority and female-owned businesses if they qualify for funding. Loans that are paid off in full before the final payment date have no additional prepayment charges added to the final balance.

    How do I Qualify?

    Funding Circle bases its eligibility criteria around three 'pillars', which, in detail, it uses to reassure its investors that their money will be loaned responsibly. The first pillar, Policy Criteria, states that a business must have been active for more than two years, have one year of complete accounts, be resident in the same country as the Funding Circle chapter they are applying to, and have had no negative legal or court activity within the previous 12 months.  The second pillar is Statistical Credit Models. This step uses proprietary software to assign each business a risk factor of A+ to E. This determines the interest rate that they will be offered on any Funding Circle small business loans. Finally, the third pillar is a human element - Expert Judgement. In this final step, each application is assessed by hand so that any peculiarities or questions not raised by the first two steps can be addressed to the applicant by the personal loan specialist.

    Advantages and Disadvantages of Funding Circle Business Loans

    Advantages

    • Award-winning low APR rates dependant on an algorithmically-assigned risk factor.
    • Option to invest in future business loans via its novel P2P lending model. 
    • Dedicated account manager.
    • Loans can be deposited in one business day.
    • 4-star review on Trust Pilot (6317 reviews)
    • Few restrictions on loan purpose.

    Disadvantages

    • Very high (5%) late monthly payment fee.
    • Guarantor required (owners).
    • Significant origination fee. 

    How do I Apply?

    • Click the Go to Site button on this page to be redirected to Funding Circle’s website
    • Click Apply Now.
    • Enter your loan amount, loan term, and the type of business you run. Click Continue.
    • Follow the directions to complete your application, carefully reading the terms and conditions before submitting it. This process should take about six minutes.

    Documents Needed to Apply

    • Business tax returns for the past two years.
    • Personal tax returns for the past year.
    • Business bank statements for the past six months.
    • Signed guarantor form.

    Funding Circle Loan for Bad Credit

    Funding Circle does not explicitly deny loans to people or businesses with poor credit scores, defaults, or other loan-orientated marks against them. The company's official mantra is that monies lost to defaults are covered by applying high-interest rates to low band borrowers (e.g. an 'E' on the Statistical Credit Model) that pay their loans back. Having said that, the minimum FICO credit score of applicants should be around 620 ("Fair") so some customers may have to look elsewhere for bad credit business loans. Again, this outlook is to reassure investors that their money is not being spent recklessly and that the impact of defaults is mitigated. However, investors in the P2P pot do report that the Funding Circle bad debt rate is fairly high, and its track record for recovering them could be improved. The company does try to diversify investors' funds to prevent Funding Circle bad debt affecting any individual person too heavily, though. 

    Customer Support

    As mentioned, Funding Circle's customer support is centered on a personal loan specialist. This member of staff is often identified by name in positive TrustPilot reviews, emphasizing their importance to the application process and the overall Funding Circle experience. Otherwise, Funding Circle has contact centers in the United States, Germany, the Netherlands, and the United Kingdom. The website does not have a live chat or email function but queries can be sent via a contact form without the need for an existing account. The turnaround is up to two days, however.

    My Conclusion

    Funding Circle small business loans have too many positive reviews online to come in for any significant criticism. The lender also has a wealth of equity investors involved in its P2P operation, including the British Business Bank. However, Funding Circle could be kinder to businesses that miss a monthly payment, as 5% on $500,000 in small business loans is a significant amount of money to swallow even for a successful small business. In summary though, much like the SBA 7(a) loans they get their inspiration from, Funding Circle business loans are a great option for the up-and-coming business. However, SBA loans have significantly more options and perks for certain segments of society, such as veterans, felons, and those businesses trying to cover damage from natural disasters. For that reason, Funding Circle tends to lose points in reviews online due to having quite a limited range of financial products.

    As far as P2P investing is concerned, Funding Circle scores much lower than some of its rivals - not least because it recently revised down its growth projections by half. A recent move to hide statistics regarding default loans has also drawn the ire of investors, as have the conditions under which users exit the platform. It's possible to withdraw funds from the eponymous funding circle, albeit on the condition that investors find a buyer for their loans and they pay a one-time fee of 0.25% of the total amount invested. The latter process can be lengthy, with some experiences placing an exit from P2P investment at nearly 150 days. For this reason, commentators have tousled with the idea that all may not be as well at Funding Circle as it may appear. It could also mean that the company is moving away from individual investors and towards larger, more secure donors instead, though.