How to set up your own bank

Small businesses are having such a hard time securing loans from their banks that they're turning to 'payday lenders'. But there's a much better alternative, says Bengt Saelensminde. One that you can profit from.

"Oh good lord... not this lot again!"

That was my reaction to news that moneylender Wonga was entering the business loans market.

Best known for its payday loans with interest rates that can stretch into the thousands of percent, they've found another market to tap into. This time it's lending to desperate businesses. And my, you'd have to be desperate to pay the sorts of interest rates they're charging.

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But wouldn't you know it, after opening the doors on Monday, they've been inundated with business callers desperate for a few quid - clearly there's a market for this stuff.

The trouble is that these people are making a terrible mistake. There is a much better way to secure funding. Today I want to show it to you.

If you've got some savings that aren't paying you enough, then this may be of interest to you. It's a way of getting your money to small UK businesses that need it. And a chance for you to earn some decent interest too.

But first let's look at why there's such a gap in the market here.

Small businesses are left high and dry

Wonga finds itself in a fortunate position. Not only are there plenty of struggling small businesses out there, but the traditional lenders have all but disappeared.

Not so many years ago, bank managers took an interest in business customers. They'd liaise closely with business owners, understand the business and provide banking services to match.

Of course the bank manager had to put the time in and it demanded a very specific skillset too. Needless to say, it doesn't fit with what you might call modern banking'.

Today's bank wants to deal either with individuals (whose credit rating is constantly tracked), or mega-businesses. Though preferably, they rather wouldn't deal with either gambling on their own account seems to be the best way to make money in this game.

Dealing with small business is too much work for too little reward. I know. I've dealt with the so-called business account managers' these days. The only time I'll ever get a call from my business account manager is if he wants to sell me something. And by that I mean something I don't want.

Most of the old-school business account managers have retired. What's on offer today are little more than sales reps. A couple of months back I explained how these guys masquerade as bank managers and have earned fortunes by ripping off unsuspecting small business owners withopaque interest rate swaps.

The point is, today banks aren't really set up to lend to small businesses at all. Last year the government struck a deal with the major UK banks - they called it 'Project Merlin'. In return for government support, the banks were supposed to jumpstart lending to small businesses and so get the economy going again. Yet despite the heralded deal, during 2011 lending to small businesses actually fell. And it fell in every quarter of the year!

Even if a small business can get a loan, the chances are it'll need a director's guarantee. So why bother? Most small business owners I know will dip their hand in their own pocket if they need some short-term cashflow.

If you're going to be personally responsible for the loan, then you may as well take it out under your own name in the first place. It's easier, it's often cheaper and it certainly saves having to jump through the hoops the banks put in place.

What's needed are lenders willing to take on the role of the traditional bank. Somebody willing to assess the situation and take on a little risk in return for a decent reward.

Step up Funding Circle

Person-to-person websites are the big, big thing. Just look at Betfair or eBay. These are platforms for punters like you and me to trade with each other without the need for a middle man. Cut out the bookie, cut out the high street store - and now you can even cut out the banker. aims to provide business loans for existing businesses that have a decent credit rating. It has a credit assessment team, drawn from the ranks of ex-bankers, who assess small businesses looking for loans.

Funding Circle allows lenders to make direct loans to borrowers and takes out a 1% annual servicing fee.

If you want to lend, then you simply hit the marketplace' tab on the homepage and you can check out some of the businesses looking for cash. Basically you put in a bid of how much cash you want to lend and at what interest rate. At the end of the auction, the best offers are accepted. The idea is that you lend lots of small amounts (£20 minimum) to lots of different businesses, thereby reducing risk.

The site says that on average, lenders receive about 8.5% interest. Now clearly that's not a spectacular return given that you are taking on some risk here (though I do notice that quite often the director gives a personal guarantee). And any default will destroy your target return.

But it's kind of fun to become a bank manager for the day. And if you want to lend to more risky businesses, you can make more money. And all the while, you'll be doing your bit to help fund small business.

As a new idea, there's no long-term data on how safe your money is, and what the returns are. On that basis, I wouldn't put too much of my money into the scheme.

If you've got any experience with the website, I'd be delighted to know. Why not check out some of the deals on offer - from a jam branding' business in London, to a tapas bar in Wales - it's all there.

I'll let you know how I get on.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.


He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.


Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.


Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.