U.K. alternative lending platform Funding Circle is perhaps best known for its unique business model. The company operates on an auction model to allow potential investors to bid on loans.
But reports from Crowdfund Insider published late last week said that that business model is about to see a major change. The company reportedly sent a letter to investors then announced on its site that the company would be shifting away from an auction model and towards a fixed interest rate for its loans.
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According to reports, Funding Circle said the change is part of its focus on “how best to build Funding Circle to deliver a marketplace that works effectively for hundreds of thousands of people in the U.K. and internationally.”
The company added that the change would allow the firm to continue growth and provide an easier way for borrowers to access working capital.
Funding Circle provided further details on the shift: “How will fixed interest rate loans work? Loans will fill on a first-come, first-served basis,” the firm explained. “Once you bid, there is no way other investors can knock your bid out with a lower interest rate, which means you don’t have to bid multiple times on a loan. Subject to the business accepting the loan, your bid will be successful.”
Reports said the platform also believes this business model will help it reach a broader audience of small business borrowers.
In an interview with P2P Banking, Funding Circle spokesman David de Koning said there were “major drawbacks” to the company’s auction model for both lenders and borrowers. “Borrowers lacked certainty of the final interest rate until the auction period was over, which led to some of them canceling their loan application,” he said, according to Crowdfund Insider. “Investors, on the other hand, experienced cash drag and sometimes had to make multiple bids to ensure they participate in the loan they wanted.”