Did you know 99% of businesses worldwide are small and medium-sized enterprises (SMEs)? They’re responsible for nearly 70% of all employment. Yet, even with the digitalisation of the banking system, securing a loan remains challenging. But this fintech stock is changing all that. Let’s take a look.
A new approach to borrowing money
Traditionally, a business loan from a bank is the go-to option for borrowing funds. However, this process can be complicated, as well as time-consuming. To make financing easier for SMEs, Funding Circle Holdings (LSE:FCH) created a new platform which connects borrowers directly to investors.
Providing they pass the credit checks, borrowers gain immediate access to funding sourced from third-party investors operating on the platform. These investors earn returns from the SMEs’ profits as the debt is repaid. Meanwhile, Funding Circle is generating revenue through small transaction fees and annual service fees.
While still relatively unknown, the platform has over 90,000 borrowers, and a network for over 100,000 investors providing the money. In total there is currently £3.7bn of loans under management.
Covid-19 has been devastating for many SMEs. The lockdowns have halted business, and many were unable to keep up with repayments. However, the stock’s management team is fully aware and introduced temporary flexibility options regarding payments. As a result, even with most SMEs shut down, over 90% of borrowers are still making their payments on time – an impressive feat in my eyes.
Lending money always has its risks
The platform is vastly different from traditional money lending systems. However, it is still exposed to the same fundamental risks. If borrowers don’t pay their debts, the investors will run for the hills, making the platform useless in the process.
As previously stated, the fintech stock provided flexibility options for borrowers during this pandemic. But, depending on how much longer the lockdowns continue, these flexibility measures may not be enough.
This is particularly worrying as nearly 50% of platform investors are institutional. Institutional investors do bring stability to the source of funds. But, if one were to lose confidence and withdraw, it could trigger a chain reaction that might significantly impact the business.
The firm is also not yet profitable and continues to lose money each year. It is generating a gross profit, meaning the platform makes more money than is being spent on operating it. However, due to lack of public awareness, the company is investing heavily in its marketing department to attract more borrowers and platform investors.
Is the Funding Circle fintech stock worth owning?
This new moneylending approach certainly sounds intriguing to me. And while it could be many years before the business turns a profit, the aggressive marketing budget appears to be working. Over the last five years, revenue has grown by 51% annually.
And even with this impressive growth, it has only captured less than 1% of the addressable SME debt market. Combining the platform’s advantages, with a substantial room for growth, makes Funding Circle just the kind of stock I like to have in my portfolio. The risks are still quite high, but I believe the potential returns justify having the share on my watchlist.