Rushcliffe Borough Council has been named as the tenth UK local authority to sign up to a pioneering small business funding initiative.
In partnership with lend-to-save platform Funding Circle,the Nottinghamshire authority is the latest to offer a leg-up to small firms via the Local Business Lending Partnership scheme, which lets councils invest in start-ups and SMEs in their area for a return.
The project, established to stimulate local economic growth and employment through improved access to business finance, is already responsible for more than £7million of funding from the government-backed British Business Bank and other councils across the country.
Bright idea: James Meekings, Samir Desai and Andrew Mullinger, founders of The Funding Circle
These include Lancashire, Nottinghamshire, Gloucestershire, Leicestershire, Camden, Kirklees, Sefton, Newcastle and Tandridge councils.
Funding Circleworks by connecting business directly with investors, to allow firms to access finance independently of their banks and lenders the opportunity to earn attractive returns.
This process means businesses can receive finance within a couple of weeks, compared to up to three months for a traditional bank loan.
Private investors have been using the service for some years to invest in firms for an interest rate return.
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Once a local authority signs up to the scheme, Funding Circle flags any businesses requesting funding in their region.
They don't fund the entire loan - in order to spread risk, their lending will make up a percentage and the rest will be funding by private retail investors.
Rushcliffe Council has so far pledged £500,000 to local businesses via the scheme.
Councillor Neil Clarke, leader of the borough council, said: 'This scheme will help local business grow, as money can be obtained quicker than via high street banks and also at competitive rates.
'Rushcliffe wants to boost borough business – and this is a pioneering way of doing so which is low risk and high impact.'
'WE USED OUR LOAN TO EXPAND THE BUSINESS AND HIRE MORE PEOPLE'
Business borrower: Scott Phillips of Erud IT
Leicestershire Council has now lent more then £270,000 via the Funding Circle scheme, facilitating more than£1.4million of SME lending, alongside private co-investors.
Erud IT Ltd, an IT support, consultancy and services specialists based in Hinckley, Leicestershire, was one of the first local businesses to receive a loan through Funding Circle. The firm borrowed £12,000 with the council funding 20 per cent of the loan.
In total the loan was funded by 110 investors from across the country. Erud IT is nine years old and employs five people. The money will be used towards expanding their premises and taking on new staff.
Scott Phillips, managing director of Erud IT said: 'With our current growth, especially in the last year, it was imperative we invested in our staff and infrastructure so we could continue to deliver excellent IT support for businesses. Approaching any of the High Street banks was so time consuming and had so many hoops to jump through.
'Funding Circle allowed us to secure funding in record time and was unbelievably straight forward. It took less than a week from applying to receiving the money in our account.
'We are now back to focusing on what really counts, growing the business and supporting our clients.
'It’s good that Leicestershire County Council are helping businesses borrow, something the banks seem averse to. Hopefully the more businesses hear about the partnership and what the council are doing the more the economy will grow, and I for one will be recommending Funding Circle to clients looking to gain funding for IT or any other aspect of their business.'
Local authority investments are exposed to the same risks and returns as other Funding Circle lenders.
Historically, Funding Circle investors have made average returns of 6.4 per cent. The current estimated return is slightly higher at 7 per cent.
This takes into account a default rate of just less than 2 per cent, although the platform recently launched an in-house collections and recoveries team, which it says has dramatically reduced late payments.
Small businesses by nature are a more risky investment, which is why the default rate is slightly higher than some of the other leading lend-to-save platforms.
Investors are advised to spread their risk among a number of different opportunities on the site.
However, Funding Circle bosses have highlighted the philanthropic benefits of investing in small businesses, given the much publicised access to funding issues many have experienced in recent years.
To date, the platform has delivered more than £395million of loans to 5,500 SMEs across the UK. To be eligible, businesses must typically have a minimum turnover of £50,000 and have been trading for at least two years.
Once businesses pass the credit assessment processes, their loan is posted on the marketplace.
As with individual investors, local councils will select businesses to lend to, and bid the amount of money they wish to invest, and the interest rate they want to earn.
Investors can bid small amounts, from as little as £20, on lots of different businesses to spread their risk.
James Meekings co-founder of Funding Circle said: 'Funding Circle investors have lent over £60 million to small businesses in the Midlands in the last four years alone. This partnership with Rushcliffe Council will allow us to help even more of the Borough’s businesses.
'Rushcliffe is the tenth council to use the Funding Circle marketplace to boost lending. We strongly believe this network will evolve to create a blueprint for an equivalent 21st century regional banking network.'
- Businesses interested in loans should email dhayden@rushcliffe.gov.uk.
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