Funding Circle, a leading small business lender, has revealed that it was the largest recipient of payouts from the Government's successor to the Covid-era Enterprise Finance Guarantee scheme. The scheme, which was introduced to support small and medium-sized enterprises (SMEs) affected by the pandemic, was designed to encourage lending to businesses that may not have otherwise qualified for credit. However, according to Funding Circle, the lender used the scheme to hand out loans to higher-risk borrowers, sparking concerns over riskier lending practices.
Under the scheme, lenders were incentivised to lend to SMEs with a lower credit score, with the Government guaranteeing a portion of the loan. Funding Circle claims that it was able to claim two-thirds of the payouts under the scheme, with the lender's CEO, Samir Desai, stating that the company had been able to 'fill the gap' left by other lenders.
The move has raised concerns among industry experts, who warn that the scheme may have created a culture of 'reckless lending' among some lenders. 'This scheme was intended to support businesses that were struggling due to the pandemic, but it seems that some lenders may have taken advantage of the Government's guarantee to lend to riskier borrowers,' said one analyst.
Funding Circle's success under the scheme has also raised questions about the lender's approach to risk assessment. While the company claims that it has a robust risk assessment process in place, some experts argue that the lender may have been taking on too much risk. 'Funding Circle's use of the scheme to lend to higher-risk borrowers suggests that the lender may be taking a more aggressive approach to lending,' said another analyst.
The news has sparked concerns among UK investors and pension holders, who are worried about the implications of riskier lending practices on the stability of the financial system. 'This development is a reminder that even well-established lenders can take on too much risk, and that investors need to be vigilant when it comes to their investments,' said one financial expert.