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SmallBusiness,BigImpactThechangingfaceofbusinessfinanceEvidencefromFundingCircleAugust2016

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©CentreforEconomicsandBusinessResearch

Disclaimer

Whilsteveryefforthasbeenmadetoensuretheaccuracyofthematerialinthisdocument,neitherCentreforEconomicsandBusinessResearchLtdnorthereport’sauthorswillbeliableforanylossordamagesincurredthroughtheuseofthereport.

AuthorshipandacknowledgementsThisreporthasbeenproducedbyCebr,anindependenteconomicsandbusinessresearchconsultancyestablishedin1992.Theviewsexpressedhereinarethoseoftheauthorsonlyandarebaseduponindependentresearchbythem.

London,July2016

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ContentsForeword 4

Executivesummary 5

1 Transformingthewaysmallbusinessesaccessfinance 8

2 Smallbusiness,bigimpact 18

3 Unleashingthepotentialofsmallhousebuilders 29

4 Appendix 33

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ForewordIthasbeensixyearssinceFundingCirclelaunchedwithabigidea-torevolutionisethewaysmallbusinessesaccessfinance.Inthattime,morethan15,000UKbusinesseshaveborrowedover£1.4billionfromawiderangeofinvestorsincluding50,000people,localandnationalgovernment,andarangeoffinancialinstitutionssuchaspensionfunds.Globally,investorshavelent$2.5billionacrosstheUK,US,Germany,SpainandtheNetherlands.

Fortoolong,UKsmallbusinessescouldonlyaccessthefundstheyneededtogrowfromasmallnumberofhighstreetbanks.Inthewakeofthefinancialcrisis,wesawjusthowfragilethisecosystemwas.Indeed,thisreportshowstheextenttowhichbanksmovedawayfromsmallbusinesslendingandhowitisstillyettorecover.

Whenwewerefirstthinkingabouthowtobetterhelpsmallbusinesses,weconsideredhowlargerbusinesseshadmultiplewaystoraisefinanceandwonderedwhysmallbusinessesdidn’thavethesamechoice.Whatwewantedtocreatewastheinfrastructure-similartoastockexchangeorbondmarket-whereanyinvestor,betheyindividuals,financialinstitutionsorevengovernments,couldlendtosmallbusinesses.

I’mpleasedandhumbledtosaythatatFundingCircle,thisisthecasetoday.Thisreportdemonstratestheimpactdirectlendingishavingonsmallbusinessesandtheeconomyatlarge.Wemustremembersmallbusinessisn’tsmall-itaccountsforhalfoftheUK’sGDPand60%ofprivatesectoremployment.Fast,flexible,faircostfinanceisabsolutelycritical,especiallyaswefindourselvesinincreasinglyuncertaintimes.

Weareparticularlyproudofthelargenumberofjobs(~40,000)thathavebeencreatedbylendingthroughFundingCircle.Businessesareleavingbankstoenjoyfaster,andoftenlowercostfinance-thisreportfindsthatwhilst77%ofbusinessesinitiallyshoppedaroundforfinance,anoverwhelming94%wouldcomebacktousfirstinfuture.

Wearealsoexpandingthesmallbusinessfinancemarket,withafifth(21%)ofborrowerstellingustheywouldhavebeenunabletoaccessfinancewithoutFundingCircle.That,andthefactthatweareabletodirectsignificantfundstoareasofthecountryliketheNorthEastwherethetraditionalfinancesystemhaswithdrawnthroughbranchclosuresandrestrictivelendingpolicies,ishugelyrewarding.

Directlendingplatforms,likeFundingCircle,onlyexistbecauseofthehugevaluetheycreateforcustomersonbothsidesofthemarketplace.Lookingahead,wewillcontinuetoputourcustomersattheheartofwhatwedo.Weremaincommittedtohelpingthousandsmoresmallbusinessesaccessfinanceandensuringinvestorsearnstable,predictablereturns,whichasthisreporttellsus,makesavaluablecontributiontotheUKeconomy.

DespitetheeconomicuncertaintywefaceintheUKfollowingBrexit,thefutureforsmallbusinesses,theengineofoureconomy,remainsincrediblybrightanddirectlendingplatformsareincreasinglybecomingthefirstchoicepartnerinhelpingthemtoachievetheirhopesandaspirations.

SamirDesaiCBE JamesMeekings

CEOandco-founder UKMDandco-founderFundingCircle FundingCircle

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ExecutivesummaryUsingevidencefromFundingCircle,thisreportexamineshowthelendinglandscapeforsmallbusinesseshaschangedsince2010.Italsoassessestheimpactdirectlending,whereinvestorslenddirectlytoborrowersthroughanonlineplatform1,ishavingontheeconomyintermsofcontributionstoeconomicoutputandjobcreation.Inaddition,thisreportexaminestheextenttowhichdirectlendingishelpingsmallconstructioncompaniesintheUKtoresolvethecountry’slongstandinghousingcrisis.

ThebusinesslendinglandscapeintheUKischangingrapidly.Directlendingtobusinessesatthebeginningof2016was50%higherthanthesameperiodayearagoandisaccountingforagrowingproportionofcapitalraisedbybusinesses.Inthesecondquarterofthisyear,closetooneintensmallfirmsapplyingforcreditappliedforfundsfromadirectlendingplatform.

Thesetrendslooksettocontinuefurtheroverthecomingyears,especiallyifaneconomicslowdownoverthenextcoupleofyearstranslatesintotraditionalchannelsbeinglesswillingtolendtocreditworthybusinessesduetotheirownsectoralorregionalcreditlimits.Sometimeagothiswouldhavemeantthatthesebusinesseswouldhavenowheretoturn,butnow,directlendingisfillingthisgap,givingsmallbusinessownersmorechoiceandenhancingcompetitioninthemarket.

Byfacilitatingdirectlendingbetweeninvestorsandborrowers,platformshavealsoopeneduppoolsofcapitalthatwerenotpreviouslyavailabletosmallbusinesses,includingretail,institutionalandgovernmentmoney.Directlendingisthusfacilitatingawiderangeofeconomicactivitythatwouldnothavetakenplaceinitsabsence–somethingweexploreandquantifyinthisreport.

Transformingthewaysmallbusinessesaccessfinance

Netlendingtosmallandmediumsizedbusinessesthroughtraditionalchannelshasfallenbyafifthinthelastfiveyears.

Theinterestratespreadforsmallbusinessloanshasrisenatbankssincethefinancialcrisis–inparttocoverhighbranchoverheadsandcapitalcosts.

Eightyearsonfromthecrisis,companiescontinuetoreportanenvironmentinwhichaccesstocapitalisconstrained,thoughtherearesignsofimprovementinrecentquarters.Thisisatleastpartlydrivenbyincreasingawarenessandusageofdirectlending,whichhasfilledagap.

Directloansaccountedfor6%ofallnewloansgrantedbythemainhighstreetbanksanddirectlendingplatformstosmallandmediumsizedbusinessesinthelastquarterof2015-upfrom3%forthesameperiodin2014.Thisriseinpopularitycanbepartiallyattributedtotheirhighqualityofservice.BasedonevidencefromFundingCircle,72%ofborrowersfoundtheexperienceofobtainingaloanfasterthanotherproviderstheyconsidered.Whilst77%ofborrowersinitiallyshoppedaroundforaloan,94%wouldcomebacktoFundingCirclefirstinthefuture.Theseplatformsarebecomingafirstchoiceforbusinessfinance.

1Atermcommonlyusedtodescribethisactivityispeer-to-peerlending.Asthesectorhasevolved,participationfromawiderrangeofinvestors,otherthanindividuals,hasincreased.InvestorsatFundingCircleinclude50,000people,localandnationalgovernmentandfinancialinstitutions.Therestofthisreportwillthereforerefertotheactivityofinvestorslendingdirectlytoborrowersthroughanonlineplatform,as‘directlending’.

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Ontheotherhand,thereisalsoaportionofbusinessesthatturnedtodirectlendingplatformsbecause,despitetheircreditworthiness,theyfoundthemselvesunabletoobtainaloanthroughtraditionalchannels.Afifth(21%)ofborrowersbelievetheywouldnothavebeenabletosecureexternalfinanceintheabsenceofFundingCircle.

Thefactthatcreditworthybusinessesfindthemselvesunabletoobtainaloansuggestsagapexistsinthemarket.Onepossiblereasonthatbanksareunabletoapprovecertainloansisthattheapplicantdoesnotholdenoughassetstotakesecurityagainst,oralternatively,thebankisalreadyover-exposedinacertainregionorsector.Directlendingplatformshavesteppedintofillthisgap,andFundingCircle’spartnershipswithsomeofthehighstreetbanks,wherebusinessesthatthebankcannothelparereferredtotheplatform,isfurtherevidenceofthis.

Potentialfutureretrenchmentbybanksinaperiodofuncertaintymayactuallyprovideanopportunityforplatformstogainmarketshare.Weexpectplatformswillbeabletocontinuetofacilitatecreditpartlybecauseofloweroverheadandcapitalcosts,butalsobecauseofthediversecapitalbasethathasbeenbuiltupatsomeplatformsoverthelastperiod.Therangeofdifferentinvestorsnowlendingthroughplatformsmeanssmallbusinessesareabletoaccesspoolsofcapitalthatwerenotpreviouslyavailabletothem.

Governmentcanplayamajorroleinfacilitatinglendingtobusinesses,andindeedhasachievedsuccessinthisareathroughtheBritishBusinessBank.Furtherlendingthroughplatformscouldprovetobeafaster,moretargetedwayofprovidingliquidityintimesofeconomichardship.Giventhefastloanprocessingtimesofferedbyplatforms,directlendingcouldbeusedasamacroeconomictooltoinjectmoneyintotherealeconomy.

Smallbusiness,bigimpact

Investmentfacilitatedthroughdirectlendingplatformssupportsindividualbusinesses,butalsotheeconomyasawhole.Lendingboostsgrowthandemploymentforindustriesoftheloanrecipients,aswellasthosesectorsalongthesupplychain.Anadditionaleconomicbenefitisrealisedasaresultoftheincreasedspendingpowerofemployeesinthesesectors.

Overthree-fifths(61%)ofFundingCircleborrowerssawtheirrevenueincreaseasaresultoftheloan,whilenearlyhalf(47%)reportedariseinprofits.

ThetotalboosttotheUKeconomy(measuredbyGrossValueAdd)resultingfromFundingCircleloanssince2010currentlystandsat£2.7billion.TheGVAimpacthasbuiltupovertime,from£39.8millionin2011,to£401.6millionin2013,reaching£2.7billionbymid-2016.

Theseloanshavesupportedthecreationofupto~40,000jobs:17,400jobsdirectlyandafurther21,100jobsthroughthebenefitsrealisedalongthebusinesses’supplychainsandduetotheincreasedspendingpowerofemployees.

FinancegeneratedthroughdirectlendingplatformsisalsosupportingsmallbusinessesintheNorth–aregionthathasfacedeconomichardshipandthattheGovernmentistryingtotargetwithasetofgrowth-boostinginitiatives.Atenth(10%)ofFundingCircleloansgotobusinessesintheNorthEast,aregionwhichaccountsforjust3%ofallUKbusinesses.

Investorsarealsolendingtohighgrowthsectorswhicharecrucialforfutureeconomicperformance.Outofthe10sectorsthataccountforthehighestshareofFundingCircleloans,fivehavegrownfasterthantheUKbusinesspopulationasawholeinthe2008to2015period.Thesesectorsincludecomputerprogrammingandconstruction.ThissuggeststhatFundingCircleisplayinganimportantrolein

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supportingsectorsthataccountforanincreasingshareofeconomicactivityandaregoingtobedrivinggrowthinthefuture.

Unleashingthepotentialofsmallhousebuilders

OneofthemostcommonlydiscussedpolicyareasintheUKoverthepastseveralyearshasbeentheongoinghousingcrisis.Since2006theUKhasaccumulatedahousingshortfallof264,000dwellings.Ontheirown,largehousebuildershavebeenunabletokeepupwithrisingdemand,whichmeansthatsmallerhousebuildersplayacrucialroleinmeetingthesupplygapthecountryfaces.

Intheyearssincethecrisis,smalldevelopershavefounditespeciallydifficulttoaccessbankfinanceduetobanksrestrictingtheirlendingtothesector.In2014,theNationalHouseBuildingCouncilconductedasurveywhichfoundthathalfofsmallbuildersfindbanks’reluctancetolendaseriousproblem.

Directlendingishelpingtoalleviatethiscrisisbysupportingthesesmallercompaniesinthehousingsector.AsofJune2016,742loanswithacumulativevalueof£183millionhavebeengrantedforresidentialpropertydevelopmentthroughFundingCircle.Weestimatethatlendingthroughtheplatformhasalreadycontributedtoapproximately2,200homesbeingbuiltacrossthecountry.

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1 Transformingthewaysmallbusinessesaccessfinance

• Netlendingtosmallandmediumsizedbusinessesthroughtraditionalchannelshasfallenbyafifthinthelastfiveyears.

• Theinterestratespreadforsmallbusinessloanshasrisenatbankssincethefinancialcrisis–inparttocoverhighbranchnetworkandcapitalcosts.

• Non-bankfinancingoptionshaveledtoarapidlyimprovedlendingpictureforsmallandmediumsizedbusinesses.Directloansaccountedfor6%ofallnewloansgrantedbythemainhighstreetbanksanddirectlendingplatformstosmallandmediumsizedbusinessesinthelastquarterof2015-upfrom3%forthesameperiodin2014.

• Businessesaredrawntothesetypesofplatformsbythespeedandsimplicityoftheloanapplicationprocess-72%ofFundingCircleborrowersfoundtheexperienceofobtainingaloanfasterthanforotherproviderstheyconsidered.Thishelpstoexplainwhy77%initiallyshoppedaroundforfinance,but94%wouldcomebacktoFundingCirclefirstinfuture.

TheglobalfinancialcrisistookasignificanttollontheUKeconomyandthebusinesscommunity.In2008and2009,GDPfell,thelabourmarketdeterioratedandpolicymakerswereforcedtotakeextraordinarymeasures–suchascuttingcentralbankinterestratestorecordlowlevels.

Banksretrenchedtheirlendingtosmallbusinessesandsmallercompaniesfailedtobenefitasmuchaslargeronesfromdeclininginterestrates,asshowninofficialBankofEnglanddataillustratedlaterinthissectionofthereport.Inpart,thisislikelytoreflecthighoverheadcosts(thecostsofthebranchnetwork)andhighcapitalrequirementswhicharethenreflectedinthecostoflendingandindeedthewillingnessofbankstolendtosmallbusinesses.

Itcoststhebanksaboutthesameamounttounderwriteandprocessa£50,000loanasitdoesa£3millionloan,meaningfinancialinstitutionsareincentivisedtofocusrelativelymoreonhighvaluelendingwhichyieldsagreaterprofit–particularlygivenhighoverheadcosts2.

Againstthisbackdrop,consumertrustwithincumbentfinancialservicesprovidersislow,withresearchbyPwCshowingthatunderathird(32%)trustretailbanks3.

UnlikeinthepreviousUKeconomicdownturnintheearly1990s,theeconomicrecoverysincetheglobalfinancialcrisishasbeenfraughtwithweaknesses,includingweakproductivity,subduedemployeeearningsgrowthandalackofsignificantexpansioninexportsdespiteasharpdeclineinthevalueofsterlingagainsttheUSdollarandothercurrencies.

Yetthereissomelightattheendofthetunnel-thelendingpictureisgraduallyimprovingwithastrongincreaseintheroleofnon-bankfinance,suchasdirectlending,whichinenablingbusinessestoaccessthecapitalthattheyneedtoexpand.Facilitatinglending,particularlytobusinessesinfast-growingindustriessuchastechnology,canplayacrucialroleingeneratingsignificanteconomicgrowthgoingforward.

2HarvardBusinessSchool,ThestateofsmallbusinesslendingbyKarenGordonMillsandBraydenMcCarthy,20143PwC,Howfinancialserviceslostitsmojo–andhowitcangetitback,2014

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1.1 ThetotalUKsmallandmediumsizedbusinessloanbookhasdeclinedbyafifthoverthepastfiveyearsLookingattotallendingbyfinancialinstitutions,mainlybanks,netlendingtobusinesseshasdeclinedsignificantlyinrecentyears,havingaknock-oneconomicimpactintermsoflowerlevelsofbusinessinvestmentandeconomicgrowth.BankofEnglanddatashowthat,overthefiveyearsbetweenMay2011andMay2016,thetotalvalueofoutstandingloanstosmallandmedium-sizedenterprisesdeclinedby18%,asrepaymentofexistingloansexceededissuanceofnewloans.

Figure1–Amountoutstandingofmonetaryfinancialinstitutionsloanstobusinesses,£billions

Source:BankofEngland

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Companiescontinuetoreportanenvironmentinwhichaccesstocapitalisconstrained.DataproducedbytheFederationofSmallBusinessesshowthatmoresmallbusinessesbelievecreditavailabilityis‘poor’than‘good’,thoughtherearesignsofimprovementinrecentquarters.Thisisatleastpartlydrivenbyrisingawarenessandusageofnon-bankfinance(whichweexaminelaterinthissection).

Figure2–Businessratingsofcreditavailability

Source:FSB

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1.2 Amongtraditionalsourcesoffinance,interestratespreadshaverisenforsmallandmediumsizedbusinessessincethefinancialcrisisPartofthepictureofrelativelyunfavourablecreditconditionsforsmallbusinessescanbeseenininterestratedata,whichshowawideningintheinterestratespreadbetweensmallerandlargercompaniessincethefinancialcrisisattraditionallendinginstitutions-asshowninFigure3below.InDecember2004,theaverageinterestratechargedonsmallloans(<=£1m)was0.4percentagepointshigherthanthatchargedonlargeloans(>£20m).Attheendof2015,averageinterestrateschargedonsmallerloanswere1.1percentagepointshigher,meaningthatsmallerbusinesseshavefailedtobenefitasmuchfromdeclininginterestratescomparedtolargerbusinesses.

Figure3–Differencebetweentheaverageinterestrateofferedbytraditionallendinginstitutionsforsmall(<=£1m)andlarge(>£20m)newbusinessloans

Source:BankofEngland,Cebranalysis.Graphshowsa12monthrollingaverageoftheinterestratespread

1.3 BusinessesareincreasinglyturningtodirectlendingBusinessesintheUKareincreasinglyturningtodirectlendingtoraisethecapitaltheyneedtoexpand,invest,andcopewithcashflowissues,aswellastoserveanumberofotherpurposes.

ThesizeofbusinesslendingthroughplatformsispoorlycapturedbyofficialdatasourcesproducedbytheOfficeforNationalStatisticsandBankofEngland,soCebrhasconsideredarangeofdatasourcesproducedbytheFederationofSmallBusinesses,BritishBankers’Association(BBA)andPeer-to-PeerFinanceAssociation(P2PFA).AcomparisonofdatasetsshowsasimilarpictureforthelikelysizeofthedirectlendingmarketintheUK,suggestingthattheordersofmagnitudedescribedbelowarerobust.

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WehavecomparedlendingtrendsshowninBBAandP2PFAstatistics.TheBBAdatabaseonlendingtosmallandmediumsizedbusinessescoversbusinessloansgrantedbymanyoftheUK’slargestbanks–Barclays,HSBC,LloydsBankingGroup(includingHBOS),Clydesdale(includingYorkshireBank),RoyalBankofScotlandGroup(includingNatwest),SantanderandCo-operativeBank.TheP2PFAdatasetcapturesloansgrantedthroughFundingCircle,Landbay,LendInvest,MarketInvoice,RateSetter,andThinCats.

Ouranalysisofthecollateddatasuggeststhatinthelastquarterof2015,outofallnewsmallandmediumsizedbusinessloans4grantedbythemainhighstreetbanksanddirectlendingplatforms,directloansaccountedfor6%ofthetotalinvalueterms.

Figure4–Newdirectloans5asashareofnewhighstreetbankanddirectloanstosmallandmediumsizedbusinesses

Source:BBASMElendingstatistics,P2PFA,Cebranalysis

Thesefindingsappeartobebroadlyconsistentwithothersources.TheFSBSmallBusinessIndexdatasetsuggeststhat,ofsmallbusinessesapplyingforcreditinagivenquarter,theshareapplyingfordirectloansstoodat6%inQ42015,buthadrisento9%bythesecondquarterof2016.ThisisshowninFigure5onpage13.

4Thecalculationsaremadeonthebasisthattheoverwhelmingmajorityofdirectlendinggoestosmallandmediumsizedbusinessesratherthanlargecompanies.5TheP2PFAdatasetusesthetermpeer-to-peerlenderstodescribethesetofbusinessesthatinthisreportarereferredtoasdirectlendingplatforms.Asinthisinstancethetwotermsrefertothesamesetoffinanceproviders,wehaveusedthetermdirectlendingplatformsforthesakeofconsistency.

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Figure5–Shareofsmallbusinessesseekingcreditthatappliedatdirectlendingplatforms

Source:FSB

Cumulatively,since2010theP2PFAreportscloseto£3billioninlendingtobusinesses.Thenumberofbusinessborrowersisalsorisingatasignificantrate.Inthefirstquarterofthisyear22,123businesseshadanoutstandingloanwithaP2PFAmember.Thisisnearlydoublethenumberofbusinesseswithanoutstandingloaninthesameperiodayearago.

Figure6–Newdirectlendingtobusinesses

Source:P2PFA

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1.4 BusinessesaredrawntodirectlendingplatformsbythespeedandsimplicityoftheloanapplicationprocessBusinesseschoosetoseekfinancethroughdirectlendingplatformsforanumberofreasonsandnotonlybecausetheyareunabletoaccessloansthroughconventionalchannels.Infact,justafifth(21%)oftheFundingCircleborrowerssurveyedaspartofthisresearch6saidtheywouldnothavebeenunabletosecureexternalfinanceintheabsenceofFundingCircle,suggestingbusinessesgenerallyturnedtoFundingCircleforreasonsotherthanhaving‘nowhereelsetogo’.TheaverageExperianDelphiscore(atypicalmeasureofacompany’screditworthiness)forbusinessesgivenan‘Eband’ratingfollowingFundingCircle’screditassessmentprocessishigherthantheaverageDelphiscoreforaUKsmallbusiness.Giventhatallofthesebusinesseswerethereforecreditworthy,theirinabilitytosecurealoanelsewhereisnotaresultoftheirperformancebutofthebanklendingenvironment.Forinstance,bankshaveexposurelimitsontheamountoflendingtoaparticularregionorsector.

Still,themajorityofFundingCircleborrowershadmultiplefinanceoptionsavailabletothem.ThetwomostcommonfactorsthatinfluencedborrowerstoobtainaloanthroughFundingCirclespecificallywerespeedandsimplicityoftheprocess.Competitiveinterestratewasthethirdmostcommonlycitedreason.Thatistosay,non-bankfinancecanbringarangeofbenefitstoborrowers.

Figure7–Themaininfluencingfactorinabusiness’decisiontoobtainaloanthroughFundingCircle

Source:FundingCirclesurvey,Cebranalysis

6Oneofthesourcescitedinthisreportisasurveyofover500FundingCircleborrowers.ThesurveywasconductedonlineandtookplaceduringtheweekofJune20,2016.ForfulldetailspleaseseeAppendixIofthisreport.

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Amongthesurveyrespondents,72%foundtheexperienceofobtainingaloanthroughFundingCirclefasterthanotherproviderstheyconsidered.23%didnotconsideranotherfinancingoption.Forthe72%ofrespondentsthatfoundFundingCirclethefastestloanprovider,nearlythreequarters(74%)expressedthattheprocesswasatleastamonthfaster.In2016,successfulFundingCircleapplicantshadthefundingtheyappliedforwithintwoweeksonaverage.

Figure8–HowdidthespeedoftheFundingCircleloanapplicationexperiencecomparetootherproviders?NBexcludesthosefirmsthatdidnotconsideranyotherprovider


WhenthebusinessessurveyedwereconsideringobtainingtheirFundingCircleloan,onlyafifth(20%)firstattemptedtosecureabankloan.Thisiswellbelowthe60%figurethatareportproducedbyNestainApril20137presented,suggestingbusinessesareincreasinglyawareofthechoicetheynowhavewhensearchingforexternalfinance.

Theprimaryreasonfornotcompletinganapplicationwithabankwasthattheprocesstooktoolong,suggestingthatbusinessesareincreasinglyturningtodirectlendingplatformsbecauseofthespeedoftheservicetheyprovide.

7Nesta;BankingonEachOther:Theriseofpeer-to-peerlendingtobusinesses;2013

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Amongthegroupofborrowersthatdidnottrytosecureabankloanfirst,thelengthoftheprocesswasalsothemainconcern,closelyfollowedbyamistrustofbanks.

Figure9–MainreasonFundingCircleborrowersdidnotattempttosecureabankloanfirstNBexcludesborrowersthatdidtrysecuringabankloanfirst


Whilst77%ofbusinessesinitiallyshoparoundbeforetakingaFundingCircleloan,theoverwhelmingmajority(94%)ofborrowerssaytheywouldcomebacktoFundingCirclefirstinfuture.Thissuggestshighlevelsofsatisfactionwiththeserviceprovidedbythecompany.Satisfactionandloyaltyarealsoevidentfromthefactthatnearlyaquarter(23%)ofallFundingCircleloansaregrantedtorepeatcustomers.

1.5 DirectlendingisfillingagaptoplayanincreasingroleinthelendinglandscapeAsalreadydiscussed,thereisaportionofbusinessesthatturnedtodirectlendingplatformsbecause,despitetheircreditworthiness,theyfoundthemselvesunabletoobtainaloanthroughtraditionalchannels.Afifth(21%)ofFundingCircleborrowersbelievetheywouldnothavebeenabletoaccessfinancethroughabank.Furthertothis,4%ofFundingCircleborrowersbelievethatintheabsenceoftheloantheirbusinesseswouldhavefailed.

Thefactthatcreditworthybusinessesfindthemselvesunabletoobtainaloansuggestsagapexistsinthemarket,andsomecreditworthybusinesseswereunabletoobtainadequatefinancingbeforethedevelopmentofdirectlending.Onepossiblereasonthatbanksareunabletoapprovecertainloansisthattheapplicantdoesnotholdenoughassetstotakesecurityagainstor,alternatively,thebankisalreadyover-exposedinacertainregionorsector.Directlendingplatformshavesteppedintofillthisgap.SomebankssuchasRoyalBankofScotlandhaveacknowledgedthisissue,andhavebegunformallyreferringsmallbusinesscustomerstodirectlendingplatformsincludingFundingCircle.

Processtoolong,66%

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1.6 DirectlendingtoplayanincreasingroleinthelendinglandscapeThecurrenteconomicclimate,inwhichtheUKfacessignificantuncertaintyfollowingthedecisionbytheBritishelectoratetoleavetheEuropeanUnion(‘Brexit’),meansthatwhilsttraditionalsmallbusinesslendinghadbeguntorecoversomewhatearlierthisyear8,itmaynowfallagain.

Havingexaminedtheaboveevidencewhichshowsbusinessesareincreasinglyturningtodirectlendingplatforms,futureretrenchmentbybanksmayactuallyprovideanopportunityforplatformstogainmarketshare.Weexpectthatplatformswillbeabletocontinuetofacilitatecreditdespiteanincreaseinuncertainty,partlybecauseofloweroverheadandcapitalcosts,butalsobecauseofthediversecapitalbasethathasbeenbuiltupatsomeplatformsoverthelastperiod–whereinvestorsincludeindividuals,financialinstitutionsandgovernments.Directlendingplatformswillthereforeatleastpartiallyoffsetthenegativeimpactofapossibleeconomicslowdownoverthecomingyears.

Therangeofdifferentinvestorsnowlendingthroughplatformsmeanssmallbusinessesareabletoaccesspoolsofcapitalthatwerenotpreviouslyavailabletothem.Thismeanssmallbusinessesarenolongerreliantonasmallnumberofhighstreetbanks,andensuresthesmallbusinesslendingecosystemismoresustainablethanitwasintheaftermathofthefinancialcrisis.

Governmentcanplayamajorroleinfacilitatinglendingtobusinesses,andindeedhasachievedsuccessinthisarea.TheBritishBusinessBankwasfirstannouncedbythegovernmentin2012withtheaimofaddressinglong-standing,structuralgapsinthesupplyoffinanceandbringinggovernmentfinancesupportforsmallbusinessestogetherinoneplace9.Its2015/16annualresultsshoweditsupportingmorethan48,000businesseswithatotalstockoffinanceof£7.5billionwhichhasbeendeliveredthrough90financepartners10.

Governmentinvolvementcanbeespeciallyusefulintimesofeconomicdownturn.Giventhefastloanprocessingtimesofferedbyplatforms,theycanbeusedbygovernmentbodiesasamacroeconomictooltodirectlyinjectmoneyintotherealeconomy.SupportingthesedirectlendingplatformscouldprovetobeafasterandmoretargetedwayofprovidingliquidityintimesofeconomichardshipthanprogrammessuchasFundingforLending.

Theeconomicgainsfromincreaseddirectlendingtobusinessesaresignificant.Thisisinpartbecausetheriseofdirectlendingplatformshasincreasedcompetitionamongallloanproviders.Anincreaseinthenumberofcompetitorswillcontinuetodriveinnovationintheofferingofloanproductsandservicesasmorefirmscompeteforcustomers.Asdirectlendingplatformscontinuetoplayanincreasingroleinthesmallbusinesslendingecosystem,traditionallenderssuchasbanksmaybegintoconsiderhowtheycanbetteraddresstheconcernsexpressedbyborrowerswhonolongerconsiderbankswhenlookingforaloan.Forexample,increasedtransparencyintermsoffeesstructuresmayattractbusinesseswhocurrentlycitelackoftrusttowardsbanksasaprimaryreasonforturningtoothersourcesoffinance.Thefollowingsectionconsidersanadditionalsetofeconomicgainsresultingfromtheriseinnon-banklending.

8TheBankofEnglandMoneyandCreditdataseriesshowsthatthevalueofthetotalUKSMEloanbookwas1.7%higherinJune2016thanthesamemonthayearago.9http://british-business-bank.co.uk/new-british-business-bank-to-support-up-to-10-billion-of-business-lending/10BritishBusinessBank,2015/16annualaccounts.

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2 Smallbusiness,bigimpact• Overthreefifths(61%)ofFundingCircleborrowerssawtheirrevenueincreaseasaresultof

theloan,whilenearlyhalf(47%)reportedariseinprofits.• LendingfacilitatedbyFundingCirclehasboostedannualeconomicoutputby£2.7billion

(measuredviaGVA).• Theseloanshavealsosupportedthecreationofupto~40,000jobsacrossnumerousindustries

includinghighgrowthareassuchastechnology.• LendingishelpingbusinessesinpartsoftheUKthathavebeenfacedwitheconomicchallenges,

suchasthenorthernregions.BusinessesintheNorthEastmakeupjust2.7%ofallbusinessintheUK.However,10.2%ofloansfacilitatedbyFundingCirclegototheNorthEast.

ThissectionquantifiesthebenefitsofinvestmentfacilitatedthroughFundingCircle.Wedividethebenefitsintothreecategories:direct,indirect,andinduced.Directbenefitsareenjoyedbytheloanrecipientsthatreceiveadditionalfunding.Indirectbenefitsresultfromincreasesinemploymentandeconomicactivityexperiencedalongsupplychainsassociatedwithagiveninvestment.Finally,inducedbenefitsaregeneratedthroughtheincreasedspendingpowerofemployees.Wemeasurethesebenefitsintermsofemploymentandeconomicoutput(measuredasgrossvalueadded,GVA11).

2.1 FundingCircleloanshaveboostedtheeconomywitha£2.7billionGVAcontributionLoansobtainedthroughdirectlendingplatformsarehavingapositiveimpactoneconomicactivity.Overthreefifths(61%)ofFundingCircleborrowerssaidtheirbusinessrevenueincreasedasaresultoftheloan.Forthoserecipientsthatsawtheirrevenueincrease,theaverageincreaseis17%.Furthermore,47%ofborrowerssawtheirprofitsriseasaresultoftheloan.Amongloanrecipientswhoseprofitsincreased,theaveragerisewas15%.

GVAmeasurestheeconomiccontributionmadebyaparticulareconomicunitsuchasaregion,businessorindustry.Itisusedasoneofthefactorswhencalculatinggrossdomesticproduct(GDP)and,inthisreport,isameasureoftherelativeeconomicimportanceofabusiness.TheGVAbenefitcanbedividedintothreecategories:direct,indirect,andinduced.12

WehaveestimatedthatthedirectannualGVAimpactofFundingCircleloansis£1.2billion.YettheaddedeconomicactivitygeneratedbyFundingCircleloansbenefitsnotonlytherecipients,butalsothosecompaniesalongtherecipients’supplychains.TheseindirecteconomicbenefitsprovideafurtherGVAboostof£752million.Additionally,theaddedspendingpowerofemployeesinjobssupportedasaresultoftheFundingCircleloansgeneratesa£709millionGVAboost(theinducedeconomicactivity).

Thismeansthatthetotal(direct,indirect,andinduced)GVAboostresultingfromFundingCircleloanscurrentlystandsatanestimated£2.7billion.

11GVAisanindicatorofeconomicperformanceandmeasuresthevalueofgoodsandservicesproducedinanarea.12ForbusinessesthatsaytheywouldhavefailedintheabsenceofaFundingCircleloan,theanalysisinthisreportdoesnotonlyconsidertheaddedturnoverresultingfromtheloanasaneconomicgain,buttheentireturnoverofthebusiness.

19


Figure10–TotalGVAboostresultingfromFundingCircleloans,bysectorNBonlythetop10sectorsareshown

Source:FundingCircleloanbook,OfficeforNationalStatistics,Cebranalysis

Ifweassumethattheshareofbusinesseswhichincreasetheirrevenueasaresultoftheloanaswellastheshareofbusinessesthatwouldhavefailedwithouttheloanhasstayedthesameineachyear,thenwecanestimatehowthe£2.7billionGVAboosthasbuiltupovertime.Thisisshowninthebelowtable.

Table1–TotalGVAboostresultingfromFundingCircleloans,byyear

BoosttoannualGVA(£millions)

2010 4.52011 39.82012 139.62013 401.62014 966.42015 2,042.2

2016(Jantomid-June) 2,664.2

Source:FundingCircleloanbook,OfficeforNationalStatistics,Cebranalysis

FundingCircleprojectsthatby2025,thetotalamountofUKlendingthroughtheplatformwillstandat$20billionperyear.IfweassumethatthecurrentlendingtoGVAboostratiopersists,thismeansthatin2025theGVAboostresultingfromFundingCircleloanswillequal$2.8billionor£2.1billionperyear13.

13Basedonexchangerateat3August2016

£262 £247

£177£142 £130 £118

£97 £85 £77 £68

0

50

100

150

200

250

300

£million

20


2.2 FundingCircleloanshavesupportedthecreationof~40,000jobsThesurveyconductedasapartofthisreportfoundthat47%ofborrowersincreasedtheirheadcountasaresultoftheloanwhile52%keptthesameheadcount.

Theaverageheadcountincreasewas2.5,sobetweentwoandthreepeople.Giventhat14,931uniquecompaniesreceivedaFundingCircleloanbetweenAugust2010andJune2016,thesurveyresultssuggestthatapproximately7,000companiesacrosstheUKincreasedemploymentasaresultoftheirloan.Keepinginmindthattheaveragenumberofaddedemployeesisbetween2and3(2.48),thedirectemploymentboostgeneratedbyFundingCircleloansis17,400.

Figure11–DirectemploymentboostresultingfromFundingCircleloans,bysectorNBonlythetop10sectorsareshown

Source:FundingCircleloanbook,Cebranalysis

InadditiontothesejobswhichareallincompaniesthathavereceivedaFundingCircleloan,thereisalsoanumberofjobssupportedincompaniesthatmakeuptheloanrecipients’supplychains.Additionally,duetotheaddedjobsthatFundingCircleloanssupportattherecipients’firmsandincompaniesalongtheirsupplychain,employeesthatholdtheseextrarolesenjoyanincreaseintheirspendingpower.

Thismeansthatoverall,FundingCircleloansoriginatedbetweenAugust2010andJune2016havecontributedtothecreationofupapproximately40,000jobs.17,400ofthesejobswerecreateddirectlywithafurther21,100jobssupportedviaindirectandinducedchannels.

1,700

1,3001,100 1,000 1,000

600 600 600 600 500

0200400600800

1,0001,2001,4001,6001,800

21


22


2.3 RecipientsofFundingCircleloansarevariedandloansareusedforarangeofpurposesThediversityoftheFundingCircleloanbookmeansthatthereisnotnecessarilya‘typical’FundingCircleborrower.ThisisespeciallytruegiventhegrowththatFundingCirclehasseeninrecentyears.Between2014and2015thenumberofloansobtainedthroughFundingCirclehasincreasedby66%.

Figure12–NumberofFundingCircleloansgranted

Source:FundingCircleloanbook

Still,consideringsomebasicbusinesscharacteristicsdoeshelpusformapictureofwhatkindofcompanyismostlikelytoseekaloanviaFundingCircle.

Table1–CharacteristicsofFundingCircleborrowers

Variable MeanLoanamount £67,500

Monthlypayment £2,100Loanterm(months) 45

Turnoverattimeofloanapplication £1,340,800Profitattimeofloanapplication £72,655


Astheabovetableshows,theaverageFundingCircleborrowertakesoutaloanofroughly£67,500whichthebusinessrepaysover45monthsonaverage.Comparedtomostbusinessloansgrantedthroughbanks,thisisarelativelysmallloanamountandisthelendingsegmentthatmanybankshavemovedawayfrom.Thisisoneofthereasonsthatsmallerbusinesseslookingforarelativelysmallloanareincreasinglyturntodirectlendingplatformsastheyfindthatfewerbanksofferattractiveloanoptionsattheirendofthescale.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013 2014 2015

23


GiventhattheFundingCircleloanapplicationprocessallowsforaflexiblevarietyofloanpurposes,borrowersusetheloanstheyreceiveforawiderangeofpurposes.Themostcommonusesaretosupplementcashflowandforequipmentpurchase.

Figure13–PrimarywayinwhichFundingCircleborrowersusetheobtainedfunds


0.6%4.1% 6.5%

11.0% 11.6%

24.1%

42.2%

0%5%10%15%20%25%30%35%40%45%

Shareofborrowers

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2.4 FundingCircleloansaresupportinghighgrowthindustriesSomeofthesectorsthataccountforahighconcentrationofFundingCircleloansareamongthehighgrowthindustriesthatplayacrucialroleinpoweringtheUKeconomy.Outofthe10sectorsthataccountforthehighestshareofFundingCircleloans(seeFigure14below),fivehavegrownfasterthantheUKbusinesspopulationasawholeinthe2008to2015period.Ifweconsidergrowthintermsofthenumberofbusinesses,thetotalUKbusinesspopulationincreasedby11%between2008and2015.However,officeadministrationexpandedby61%,personalservicesby21%,computerprogrammingby18%,constructionofbuildingsby16%,andfoodandbeverageservicesby13%.14

AllofthesesectorsaccountforarelativelyhighshareofFundingCircleloans.Therefore,thereisevidencethatFundingCircleisplayinganimportantroleinsupportingsectorswhichaccountforanincreasingshareofeconomicactivityandaregoingtobedrivinggrowthinthefuture.

Figure14–ShareofFundingCircleloans,bysectorNBonlythetenmostpopularsectorsareshown


14CalculationsbasedondatafromtheAnnualBusinessInquiry–WorkplaceanalysisbyIndustrycompiledbytheOfficeforNationalStatisticsandpublishedbyNOMISinDecember2015.

Retailers,9.6%

Specialisedconstrucpon,7.6%

Computerprogramming,6.1%

Wholesale,5.8%

Officeadministrapon,5.7%

Personalserviceacpvipes,3.3%

Retailandrepairofmotorvehicles,3.3%

Foodandbeverageservices,3.2%

Legalandaccounpngfirms,3.2%

Construcponofbuildings,3.0%

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2.5 FundingCirclehelpsbusinessesintheNorthtoaccesscapitalNearlyaquarter(23%)ofFundingCircleloansgotobusinessesintheSouthEast–ahighersharethanforanyotherregion.ThisistobeexpectedastheSouthEasthasthehighestproportionofbusinessesinthecountry.

However,FundingCircleloansarealsopopularamongbusinessesinpartsoftheUKthathavefacedgreatereconomicchallenges,suchastheNorth.AsthebelowgraphshowstheNorthEasthasthecountry’ssecondlowestgrossvalueadded(GVA).ItalsohasthesecondlowestGVAperheadafterWales.

Figure15–Totalgrossvalueadded(GVA4)byregionin2013,currentprices,£billions

Source:OfficeforNationalStatistics

Partiallyduetothiseconomicunderperformance,businessesintheNorthEastmakeupjust3%ofallbusinessesinthecountry.However,10%ofFundingCircleloansgototheNorthEast.ThisisshowninFigure16onpage26.

£0£50£100£150£200£250£300£350£400

£billion

s

26


Figure16–DistributionofFundingCircleloansandUKbusinesses,byregion

Source:HouseofCommonsbusinessstatistics,FundingCircleloanbook,Cebranalysis

TheoverrepresentationoftheNorthEastandtheNorthWestamongFundingCircleloanrecipientsshowsthatitsactivitiesaresupportingeffortstobalanceeconomicgrowthacrossthecountrybysupportingunderperformingregions.TheGovernment’s‘NorthernPowerhouse’agendaaimstospreadwealthandjobopportunitiestothenorthernregions.FundingCirclesupportsthismissionbyfacilitatingloanstolocalbusinessesintheseareas.

0%

5%

10%

15%

20%

25%

SouthEast

London Midlands NorthWest

SouthWest

NorthEast

Scotland EastAnglia

Wales NorthernIreland

ShareofFundingCircleloans Shareofthebusinesspopulapon

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FundingCircleloansfurthersupporttheNorthernPowerhouseagendabycreatingjobs.AcrosstheNorthWest50%ofFundingCircleloanrecipientssaidthattheirheadcountincreasedasaresultoftheloan,whilethefigurefortheNorthEaststoodat47%.Thisjobcreationintheprivatesectorhelpscurtailpublicsectordependence,whichishigherintheNorthernregionsthanintheSouth(seeFigure17).

Limitingpublicsectordependenceisalsoacrucialstepinboostingregions’abilitiestohandleanyfutureeconomiccrisis.Becauseaneconomicdownturnisoftenfollowedbypublicspendingcuts,ahighdependenceonpublicsectoremploymentmakesregionsdependentonthepublicsectormorevulnerable.Thereforecreatingmorejobsintheprivatesectorenhancesaregion’sabilitytoweathereconomiccrises.

Figure17–Publicsectoremploymentasshareoftotal

Source:OfficeforNationalStatistics

0%

5%

10%

15%

20%

25%

30%

Publicsectoremploymentasshareoftotal UKaverage EnglandAverage

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3 Unleashingthepotentialofsmallhousebuilders

• Since2006theUKhasaccumulatedahousingshortfallof264,000dwellings;ontheirownlargehousebuildershavebeenunabletokeepupwithrisingdemand

• Inordertoprovidethenecessaryhomesinthefutureitisnecessarytoensureadequateaccesstofinanceforsmallhousebuilders,yetthesedeveloperscontinuetostruggletoaccessfinancethroughtraditionalsources.

• ThroughFundingCircle742loanswithacumulativevalueof£183millionhavebeengrantedforresidentialpropertydevelopment.

• Theseloanshavealreadyhelpedaddressthehousingcrisisbycontributingtotheconstructionofapproximately2,200homesacrossthecountry.

Thefollowingsectionconsidershowdirectlendingplatformscanplayaroleinaddressingthehousingcrisis-oneofthemostcommonlydiscussedpolicyareasintheUKoverthepastseveralyears.

3.1 OverthepastdecadetheUKhasaccumulatedahousingshortfallof264,000dwellingsAlthoughpocketsofunaffordabilityexistaroundthecountryduetosharppricerises,LondonandtheSouthEasthavebeenthemostimpactedregions.Between2006and2016,averagehousepriceshaverisenby97%inLondonandby52%intheSouthEast.ThecomparablefigurefortheUKasawholeis45%.15

Thehousingcrisisimpactsnotonlythosetryingtogetontothepropertyladder,butrenterstoo.BasedondatafromtheOfficeforNationalStatistics,averageLondonrentshaveincreasedby20%overthefiveyearsto2015.Mediangrossemployeeearningshaverisenbyjustaquarterofthat(5%)overthesamefiveyearperiod,meaningthatthecostofhousinghasbecomefarlessaffordableformany.

Thedriversbehindthepriceincreaseshavecomefromboththesupplyanddemandside.LondonandtheSouthEastbothhavehigh-achievingeconomiesthathavedrawninnewresidentsthereforeboostinghousingdemand.Additionally,duetoitsstrongperformanceoverthepastyearsandresiliencetoeconomicshocks(pricesrecoveredveryquicklyafterthe2008/09financialcrisis)Londonpropertyhasdrawninmanyinternationalinvestors.

Onthesupplyside,thelevelofhousebuildinghasconstantlyunderperformedcomparedtothegrowthinthenumberofhouseholds.Oneofthereasonsbehindthisisthatmanybuilders(bothsmallandlarge)wereforcedtoshutdownasaresultofthefinancialcrisis.Intheyearssincethecrisis,smalldevelopershavefounditespeciallydifficulttoaccessbankfinanceduetobanksrestrictingtheirlendingtothesector.In2014,theNationalHouseBuildingCouncilconductedasurveythatfoundthathalfofsmallbuildersfindbanks’reluctancetolendaseriousproblem.16

15BasedontheUKHousePriceIndexcompiledandpublishedbytheLandRegistry16http://www.insidehousing.co.uk/journals/2014/10/15/f/d/p/NHBC-FOUNDATION-REPORT-OCT-2014.pdf

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Thegraphbelowcomparestheannualincreaseinthenumberofhouseholdswithchangesinthedwellingstock.Foreveryyearinwhichtheredlinedipsbelowthebarlevelthereisashortfallinsupply.Cumulatively,theUK-widebuildingshortfalliscurrentlyestimatedat264,000dwellings.

Figure18–AnnualincreaseinUKhouseholdsandthedwellingstock

Source:DCLG,Cebranalysis

3.2 FundingCircleloanshavehelpedtobuildasmanyas~2,200homesDirectlendingplatformssuchasFundingCirclearehelpingtoalleviatethishousingcrisisbysupportingthosesmallcompaniesinthehousingsectorthathavestruggledtoaccessfinancesincethecrisis.BasedontheFundingCircleloanbookfromAugust2010toJune2016,theplatformgranted742loansforresidentialpropertydevelopment.Thecumulativevalueofthe742loansforresidentialpropertydevelopmentis£183million.

UsingdatafromtheOfficeforNationalStatisticsandthecensuswehaveestimatedtheaveragesizeofahomeinvariousUKregions.WethenappliedthisdatatoabuildingcostsestimatorproducedbyJewson17assumingaonestoreyhomewithstandardbuildingqualitycontractedtobuildersandsubcontractorsandarriveattheaverageperhomebuildingcostspresentedonthefollowingpage.

17Sourcelink:http://www.jewson.co.uk/working-with-you/for-self-builders/preliminary-planning/calculators/build-cost-calculator/

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Table2–NumberofhomesbuiltwithinvestmentfromFundingCircle,byregion

RegionAmountofborrowingthroughFundingCircleforresidentialpropertydevelopment(£)

Averagehomesize

(m2)

Averagebuildingcost

(£)

Homesbuiltasresultoffinancethrough

FundingCircleLondon £69,000,000 72.4 £86,112 800

SouthEast £61,000,000 82.9 £87,067 700SouthWest £16,000,000 82.5 £79,182 200NorthWest £15,000,000 80.9 £77,274 190Midlands £12,000,000 82.9 £75,696 160NorthEast £7,000,000 80.0 £72,960 90EastAnglia £3,000,000 83.1 £79,182 40

Total £183,000,000 2,190

Source:OfficeforNationalStatistics,Nomis,Cebranalysis

BasedontheaveragecostofbuildingahomeineachregionandthescaleofFundingCircleloansthroughoutthecountry,financetakenbysmallerpropertydevelopersthroughFundingCirclecouldhavealreadycontributedtoapproximately2,200homesbeingbuilt.

Giventhescaleofthehousingcrisis(264,000dwellingshortfall),thereisgreatpotentialfordirectlendingplatformstofacilitatelendingtotheconstructionsectorthatcanthenusethatfundingtoboostsupplyandalleviateaffordabilitypressuresonUKresidents.Thispotentialstemsfromthefactthatmanysmallbuildershaveaccesstothesuppliesandlabournecessaryforhomebuildingbuthavefoundbanksreluctanttolendintheaftermathofthefinancialcrisis.Directlendingplatformscanmatchupthesesmallbuilderswithinvestorswhoarewillingtolend.

Anotherreasonwhyitisessentialtosupportsmallbuildersisthatmanylargedevelopersareworkingatornearcapacityandareonlyexpandingcapacityataverymeasuredrate.18Thispresentsaneedandanopportunityforsmallerbuilderstoboostoutputandcontributetowardsasustainablelevelofnewhomes.

Giventhecurrenthousingshortfallofhundredsofthousandsofhomesandthecountry-wideperhomebuildingcostof£79,514,thetotalamountofmoneythatneedstoberaisedtoaddressthecrisisis£21billion.

FundingCircleandotherdirectlendingplatformscanplayanimportantroleinhelpingtoraisethisfinancebyfacilitatinglendingtosmalldevelopers,whichthebankingsectorhasbeenlessfocusedonserving.Partiallyasaresultofthelackoffinance,thepaceofbuildinghascontinuouslydraggedbehindtheriseindemand,pushinguppropertypricesandrents,therebyputtingaddedfinancialpressureonmanyfamilies.Giventhatmanyprospectiveinvestorsarelookingtodiversifytheirportfolioswithhighperformingassetclassessuchasproperty,directlendingplatformscanplayacrucialroleinraisingthe£21billionneededtoboostthehousingsupply.

18http://pdf.euro.savills.co.uk/uk/residential---other/spotlight-residential-development-2015.pdf

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4 Appendix 4.1 Appendix1OneofthesourcescitedinthisreportisasurveyofFundingCircleborrowers.ThesurveylinkwasemailedtoFundingCircleborrowersandparticipationwasvoluntary.IttookplaceonlineduringtheweekofJune20,2016.Thetotalnumberofsurveyresponseswas531.

Questionsaskedinthesurveywereasfollows:

HowlongagodidyoutakealoanthroughFundingCircle?WhatwasthemaininfluencingfactorinyourdecisiontoborrowthroughFundingCircle?HowimportantwerethefollowingfactorswhenyouborrowedthroughFundingCircle?ThinkingaboutthelastloanyoutookwithFundingCircle,didyouattempttosecureabankloanfirst?

• Whatwasthemainreasonthatyourapplicationforcreditwasnotcompleted?• Whatwasthemainreasonwhyyoudidn'tattempttosecureabankloanfirst?

HowdidyourexperienceoftakingaloanthroughFundingCirclecomparetootherprovidersyouconsidered?

• Howmuchfaster?• Howmuchslower?

HowlikelywasitthatwithoutFundingCircle,youwouldnothavereceivedexternalfinance?• Whichsourceoffinancewouldyouhaveused?• Whatwouldhavebeentheimpactonyourbusinessofnotsecuringfinance?

HowdidthelastloantakenthroughFundingCircleaffectemploymentatyourbusiness?• Byhowmanypeoplediditincrease?

Werethepeopleyouhiredpredominantlyskilled/semi-skilled/apprentices?Andweretheypredominantlyfromyourbusiness’localarea/recruitedfromoutsideofthelocalareabutfromwithintheUK/recruitedfromoutsidetheUKWhatistheprimarywayinwhichyouhaveusedyourlastFundingCircleloan?HowdidyourlastFundingCircleloanimpactyourbusiness’revenue?

• Howmuchhasyourrevenueincreasedby?HowdidyourlastFundingCircleloanimpactyourbusiness'profit?

• Howmuchhaveyourprofitincreasedby?Shouldyourbusinessrequirefurtherexternalfunding,whatareyoumostlikelytodo?WhatwouldbeyouronerequestforgreatersupportfromtheGovernment?

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4.2 Appendix2ThefollowingnoteelaboratesonthemethodologyusedinSection2ofthisreport.

CebrusedacombinationofnationalstatisticalsourcesanddataprovidedbyFundingCirclerelatedtothebusinessesthatitfacilitateslendingto.

ToestablishthecontributionsandimpactsofFundingCircle,weadoptedtheframeworkprovidedbyONS’supply-usetables,themostdetailedofficialrecordofhowtheindustriesoftheeconomyinteractwithotherindustries,withconsumersandwithinternationalmarketsinproducingthenation’sGDPandnationalincome.

Makinguseofthesupply-useframeworkforsuchpurposesisoneofthebestmeansofensuringconsistencywiththenationalaccountingframework.Theprocessofembeddingaspecificcompanyorsub-sector,oraspecificgroupofcompanieslikethosethatborrowthroughFundingCircle,withinthisframeworkinvolvesassigningthemanexplicitrolewithinthemodels.Oncethisembeddingprocessiscompleted,wehavethefoundationforestablishing:

• Theeconomiccontribution(ordirectimpact)oftheFundingCircle-fundedbusinesses,usingstandardmeasuresofGVAandemployment.

• ThewidereconomicimpactofthesebusinessesontheUKeconomy,usingLeontiefinput-outputmodellingtoestimateafullsetof(matrix)multipliers,capturingdirect,indirectandinducedimpactsonGVAandemployment.

WeusedthemultipliersinconjunctionwiththedirectimpactstocalculatetheabsolutevaluesoftheimpactsofFundingCircle-fundedbusinessesthroughtheirsupplychains(indirectimpacts)andthroughthebusinessesinthewidereconomyinwhichthedirectandindirectemployeesofFundingCircle-fundedbusinessesspendtheirwagesandsalaries(inducedimpacts).

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