Lancashire council becomes online lender

Peer-to-peer lending works by matching loans with lots and lots of small investors

Lancashire County Council is to become the first local authority to invest taxpayers' money directly into an online lender that connects savers and borrowers.

The council will invest £100,000 into local businesses using Funding Circle, a marketplace where people directly lend to small businesses.

It means that businesses essentially bypass the banking system.

Funding Circle has already lent out a total of £55m as the industry booms.

The so-called peer-to-peer lender boasts an average gross return for investors of 9.1% on its website.

Lancashire County Council said it hopes the partnership will grow to a "multi-million pound commitment" over the next five years.

'Groundbreaking'

"This is a groundbreaking new way to fund business growth and a first for any council in the UK," said Councillor Michael Green.

"This approach to business funding has proved popular in other parts of the country and across the globe. It's directly supported growing businesses and created new jobs."

Lancashire Council will fund about 20% of a loan to a local business.

Funding Circle assesses at the creditworthiness of businesses and then their loan is posted on its marketplace. From there, investors choose which type of businesses to lend to, and bid the amount of money they wish to lend from as little as £20.

The risk of the loan is spread out over lots of investors lending small amounts.

This new partnership will free local businesses from the shackles of the High Street banks so that they can continue to grow and fulfil their potential," said James Meekings, the co-founder of Funding Circle.

The industry has been growing rapidly in the past year and is being tipped as a serious threat to traditional banks, the BBC's personal finance correspondent Simon Gompertz has reported.

The industry is led in the UK by Zopa, which has lent more than £200m since it started in 2005. Funding Circle has been around since 2010.

With small businesses finding it hard to borrow from banks in the current economic climate, the peer-to-peer lending has taken off and earlier this year, the government said it would lend these sort of firms £100m to help expand their own lending to businesses.

Peer-to-peer lending is riskier than a loan from a bank as it does not qualify for protection from the Financial Services Compensation Scheme, which provides security up to £85,000 per bank for each saver.