Funding Circle Success could put banks into a Flat Spin

The initial success of a new SME lending service aimed at bypassing traditional banks may be getting the major clearers into a flat spin.

Since its launch in August, FundingCircle.com has attracted over 1600 private lenders who have so far lent over 1 million pounds to small businesses.

The service offers lenders (investors) a return of around 8%. For the small business borrower, this is a far cheaper interest repayment rate than the typical bank loan on offer with interest rates up at around 12%. With innovative financial services like Funding Circle competing directly with banks in the small business finance space, the banks are going to have to keep an eagle eye on market developments.

FundingCircle.com may attract copycat services if its success continues, spelling out more danger for the banks in the future.

The major clearers may have been reluctant to lend to even creditworthy business concerns during the crisis, but coming out the other side of the downturn, they might not find they are operating in the same cosy world when they do return in earnest to the lending game.

Alternative sources of finance have sprung up while they've been playing hard to get. Some may say they deserve what they get!