A Closer Look at P2P Business Lending in the US

Last week, Funding Circle announced that it had raised $65M in venture capital, only nine months after its last $37M round. Funding Circle is a British peer-to-peer (P2P) lending site that allows individuals to lend money directly to UK small and medium businesses. A key benefit of Funding Circle loans is in their fast approvals (“a few days”, compared to a 15-20 week process at traditional banks) at similar interest rates. The company recently expanded into the US by merging with US-based Endurance Lending Network in October 2013. In the US, the peer-to-peer lending space is dominated by two companies — Lending Club and Prosper — given the regulatory complexity in the US. These two companies corner 98% of a fast growing multi-billion dollar market (source). Just last week, market-leader Lending Club announced that it had crossed the $5B mark in total loans issued, with $1B of it issued in the past quarter alone (source). Last month, Lending Club was also reported to be planning a $500M IPO in the second-half of 2014; the company was valued at $3.8B in April this year, a 63% jump from November 2013(source). In the area of P2P loans specifically for businesses, Lending Club is the only one out of the two that offers business loans.

The lack of competition in the promising P2P business lending market makes the space highly lucrative — an opportunity that Funding Circle is well-positioned to capture, given its prior P2P business lending experience in the UK and its $123.3M war chest. Moreover, P2P business lending is still relatively new for the 800-pound-gorilla — Lending Club only launched business loans in March 2014 and is only limited to a few investors at the moment, while the company assesses “how the asset class performs” (source). It is worth noting that Funding Circle’s US platform is only available to accredited investors given the regulatory hurdles, although Funding Circle aims to offer it to non-accredited investors in the medium-to-long run (source).

Going forward, P2P business lending in the US looks to be a big opportunity. In the UK, the demand for P2P business loans allowed Funding Circle to grow 150% a year over the past four years (source). The Small Business Administration has also estimated a $100B funding shortfall in the US economy (source). With no clear leader in the P2P business lending space, the race is now on. There are now more than 35 P2P and, tangentially, non-P2P business lenders in the US. Between the largest players, it is interesting to note that one of the investors in Funding Circle, Accel Partners, was also an investor in Prosper. Given how it would be a conflict of interest for investors to invest in their portfolio company’s competitors, it seems likely that Funding Circle and Prosper will focus on their existing strengths (i.e. business and consumer lending respectively) to attack Lending Club at the flanks. Above all, changes in the US regulatory landscape going forward remain a key issue to look out for. However, opening up P2P business lending to non-accredited investors may not even be a prerequisite to success given the intense institutional investor interest that Lending Club and Prosper are already receiving (source).