FB EDucator

Small businesses have been called the lifeblood of our economy, and today a a financial services startup has picked up a significant round of funding to help them circulate better. Funding Circle, a UK-based peer-to-peer lending platform that lets individuals and institutions loan money to small businesses, has picked up a $37 million round of funding. Along with this, it’s annnouncing plans to take its business to the U.S., its second market, in a merger with San Francisco-based Endurance Lending Network. The Series C round was led by new investor Accel Partners, along with participation from Ribbit Capital (another new investor) and existing backers Union Square Ventures and Index Ventures, and it brings the total raised by Funding Circle to $58 million.

Samir Desai, the co-founder and CEO, tells me that as part of its merger deal, Endurance will be rebranding as Funding Circle. It’s a convenient union: Endurance will give Funding Circle regulatory and country-specific knowledge, while Funding Circle will come with experience-based risk modelling and the capital to take on the U.S. more aggressively. Desai estimates that today there is some £14 million ($23 million) lent each month in the UK, “and we think it’s three to four times as much in the U.S.”

The smaller U.S. company had raised some $1.5 million from angels including Barry Silbert, the founder and CEO of Second Market.

Since 2009, Funding Circle says that it has facilitated over $250 million in loans in the UK, the only market where it has operated up to now. While it got its start as a platform for ordinary people to lend money, it has over time expanded to include accredited investors, institutional investors, the UK government (which put £20 million/$32 million into its marketplace in December 2012) and even the banks that it was originally set up to shake up and disrupt. That’s because it’s become financially unfeasable for banks to make small loans to small businesses, but they still want to keep those companies as larger customers.

“A lot has changed for banks since 2008. High capital requirements have led them to pull away from the low end of the market, and so £50 investments” — the average amount lended on Funding Circle — “are too expensive for them to do. But rather losing those businesses as customers altogether it’s good to partner with Funding Circle. It means they can still serve customers they can’t serve themselves.”

In the U.S., the model will be modified somewhat: lending will only be open to accredited investors; unaccredited individuals will not be able to invest. Desai says that this is partly because of regulatory issues, but he also points out that this doesn’t mean a small pool of lenders, since there are some 10 million accredited investors in the U.S. today.

So far, the business model behind Funding Circle has been an effective one for getting money to businesses that need it to grow. It turns out that there are a lot of small businesses out there that need capital for projects that haven’t been able to raise it elsewhere. “These aren’t the types of small businesses that you read about on TechCrunch,” he told me, saying they are on average 10 year-old companies. “The market size in the UK alone has felt gigantic to us. That’s the reason why we haven’t had to go to other countries. We didn’t have to go to the U.S. but we felt it was a huge opportunity and quite excited.” He says that typical loan periods for deals on its platform are around 48 months, but with a range of between six months and five years, with an average interest rate of 9%, small compared to traditional banks.

Longer term, the plan will be to supplement basic loans with those aimed at specific purposes, such as real estate investments.