Lancashire’s twist on local authority banking

Lancashire County Council has joined forces with the Funding Circle to create an investment vehicle initially designed to draw on a national pool of investors but with the longer-term aim of encouraging local ratepayers to provide backing.

The council is providing £100,000 to get the venture off the ground and, with investors able to put up as little as £20, the platform is being provided to encourage Lancastrians to back local businesses.

Both the council and Funding Circle, the online market providing a direct link for investors in small businesses, feel their local business lending partnership will avoid the problems that forced Banking on Essex to close its doors in February 2011.

The joint venture between Essex County Council and Santander struggled for two years and blamed budgetary constraints and a lack of demand from small businesses for its failure. The bank lent only £535,000 and cost £386,000 to establish.

However, Samir Desai, co-founder of Funding Circle, sees the new partnership with Lancashire as a possible blueprint for small business lending in the public sector.

“This is alternative funding, not banking … a different model that creates a virtuous circle of investment. [And] there will be no set up time – successful businesses can access money in days.”

Funding Circle, which launched two years ago, provides an online platform to link investors and companies. Underwriters carry out credit checks on businesses looking to borrow and, once they have passed the test, details of their funding needs are displayed on the website.

Potential backers are invited to submit an offer for what they are prepared to invest along with interest rate expectations. The council is expected to provide about 20pc of a small business loan, while investors can ask for their money back at any time.

A Funding Circle study showed that 42pc of small businesses in the North West would hire more people if they could get quick access to finance.