LFP034 – SME Lending in the Fintech Age with Andrew Mullinger Co-Founder of Funding Circle

Co-founders Samir, James and Andrew

Co-founders Samir, James and Andrew

Funding Circle need no introduction being the heavyweight SME marketplace lender in the UK and the only global player to have a large footprint in both the UK and the US.  Those on the conference circuit may be more familiar with Andrew’s co-founders, Samir Desai and James Meekings; Andrew has tended to stay at home with his head under the bonnet working on the engine within Funding Circle – that of the credit underwriting process.

SME lending is a prosaic phrase but one that is vital for a modern economy that is undergoing an ever increasing bifurcation into gigantic oligopolistic corporations or smaller companies. Finance is the lifeblood of such smaller companies and as the first line of Andrew’s LinkedIn says:

“The aim of every business should be to change the way other people live their lives for the better, not that of the founders!”

They are certainly doing that and at this rate will deservedly also change the lives of the founders and staff as Funding Circle are on everyone’s “tiny handful” list of big players with very short odds to IPO.

In this show we dive into the world of SME credit and lending in the Fintech Age.

Plenty of hardcore content; points discussed include:

– FC are around 210-220 people in the UK and 120 in the US right now

– the difficulty of knowing precise volumes in SME lending in the US but FC are definitely one of a small handful at the top

– Andrew tells the tale of how Funding Circle started and the importance of saying yes at the right time

– the genesis of the thinking and mentality behind Funding Circle

– how things change – at the time FC were concerned about a firm that had started just before them [but didn’t survive – Yes Secure’s Closure]

– FC’s thinking on the advantages of marketplace models compared to provision-based models

– why there is a gap in the market for new SME lenders – the strategic and tactical reasons behind this

– an interesting explanation of the difference in complexity between consumer lending and SME lending; the changing world of data on companies

– the arithmetic of how much one can afford to spend doing due diligence on small deals

– the changing model of FC lending in the US

– FC average loan ~43mts; terms vary from 6mts-5yrs; most loans 3-5yrs

– larger ticket sizes compared to consumer lending means less data points and so credit models take longer to evolve (which gives a greater IP/competitive advantage for mature platforms in the SME space)

– FC have found that the first 12-14mts performance of loans is hugely correlated to their longer term performance

– how the FC credit model has improved over time; how they measure success and what the improvement has been on that basis

– FC track every company in the UK to enable them to have a measure of market performance to differentiate between better lending per se and a better business climate [an important point that many miss I feel]

– FC approach to credit model over-fitting/under-fitting/generalisation/degradation

– how models evolve over time from a startup through to a growing-up platform; the impact of this on locking-in competitive advantage

– “in marketplace models you end up having dominant players”

– expanding platforms lending range – comparing expanding into different verticals (all too popular right now?) versus extending the credit range; the risky approach versus more continuous evolution/incremental change

– the bleeding edge of Alternative Finance being that Provision Funds tend to have too much money most of the time then too little (cf in banking for centuries); for marketplace models that there is no good way at present of measuring how well grading is done (q.v. Moodys/S&Ps role in the ’08 crash)

– FC’s approach of transparency in this context and move over time to releasing more metrics/data

– the role of FC’s introduction of minimum bid rates in trying to direct the market towards recognising the need for a premium in lower credit grades yields

– FC’s hiring of a Global CRO and Head of US business

– a more hierarchical approach to risk in the company; the need, as eg with #oldFS, for multiple layers of oversight to the risk process [generally missing in P2P right now … will probably await regulators waking up in this regard and forcing the issue]

– the importance of good governance in startups

– FC’s plans for expansion and the use of their recent $150m E-round raise

– the vital importance of SME lending to employment and hence its very real role in improving peoples lives

And much more 🙂

Share and enjoy!