Are banks being crowded out?


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.


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.”