Funding Circle is a disliked fintech that is going cheap

Funding Circle, a lending platform, has experienced difficulties since going public in 2018, but it appears to be in a strong position to expand

Do investors need to buy in?

Since Funding Circle's 2018 initial public offering (IPO), investors have found it difficult to comprehend the company. Even tho a single "whale" investor took up half of the offer, the fintech was only able to get away with 1.5 billion, while the City had been hoping for a valuation of 1.75 billion. The shares never recovered to trade above the offer price of 440p after falling 23% in the first week of trading.

But after a protracted period of low returns, losses, and uncertainty, things might be getting better. We should first examine what the company does and how the model has evolved in order to determine why.

The business model and direction change of Funding Circle.

Funding Circle was established to facilitate better access to financing for small and medium-sized businesses (SMEs) in the UK by bringing investors and borrowers together. The business invested a lot of money in marketing to reach potential clients and technology to develop its platform in its early years. All of its earnings and more were spent on these endeavors. The company lost a total of 230 million in 2018, 2019, and 2020.

It began as a peer-to-peer (P2P) lending platform that linked SMEs seeking to borrow money with retail investors. This was intended to upend the conventional lending market, in which a lender finances loans using its own balance sheet.

Rather, Funding Circle supplied the technology that served as a middleman between the two parties. But it turned out to be too expensive to be useful. Thus, at the beginning of the pandemic in April 2020, the group blocked new investors from accessing its P2P platform, and in 2022, the platform was permanently shut down.

The pandemic made it possible for Funding Circle to take full advantage of government lending programs, which resulted in significant cost savings. This model is still in use today. The group's financial needs are satisfied by a mix of institutional-backed loans and government funding.

Almost immediately, the business benefited from this change. It reported a profit of 64 million for the 2021 fiscal year, a significant improvement over the 108 million loss for the previous year. The government's Bounce Back Loan program during the pandemic was the main driver of this expansion. Funding Circle fell back to a loss over the next two years. It then turned a profit in 2024 following two years of losses totaling forty million. The lender appears to have cracked the code this time.

The Funding Circle is at a turning point.

According to brokers Canaccord Genuity, Funding Circle has now reached "escape velocity" following a "key earnings inflection point". The group reported 204 million sales and 26 million adjusted profit before taxes for 2025. According to management, revenue increased by 50% in the first half of the current fiscal year, with a profit before taxes of £23 million at a margin of 17%.

In the first half of the year, the company typically experiences higher borrowing activity. Nevertheless, Canaccord Genuity projects a run-rate of over 250 million in revenue and 37 million in profit before taxes based on activity in the second half of 2025 and the first half of 2026. Given the funding environment, these figures are all the more impressive. The last time the business was this successful was during the pandemic, when there was a lot of demand and low prices. Rates are still high today, and economic activity is, to put it mildly, uneven.

Funding Circle has always had an advantage in technology. This enables it to swiftly and effectively evaluate borrowers prior to deciding whether to grant a loan. Additionally, the group now operates performance history, reporting, and servicing at a scale that is challenging for newcomers to match. It has therefore become adept at drawing in institutional capital. The hard work is done by its refined, domestic technology, which provides capital providers with the necessary returns at low risk.

The company signed 900 million in forward flow agreements with funders in the first half of the year, promising to buy a consistent flow of newly created loans from lenders like Deutsche Bank. This off-balance sheet funding now accounts for 93% of all assets under management.

Funding Circle is better informed.

In the meantime, Funding Circle has expanded into new products, such as short-term loans. As a result, it has transformed from a provider of term loans into a more comprehensive SME financing platform centered on three customer offerings: credit cards, FlexiPay (buy now, pay later), and long and short-term loans.

These help Funding Circle strengthen its information edge and make the platform more appealing to borrowers. When a borrower utilizes all of these products, a significant amount of data is produced that Funding Circle uses to inform its lending models. Lending decisions are now supported by 15 years of proprietary data from credit cycles.

Over the coming years, Funding Circle's profit growth should pick up speed as it expands on the foundations it has established. By 2028, Canaccord Genuity hopes to increase its top line by 50% to almost 300 million. The broker predicts that the group's adjusted earnings before interest, tax, depreciation, and amortization (Ebitda) margin will increase from 15.3 percent to 27.6 percent as it grows its tech platform. In 2028, Ebitda is expected to reach 82.2 million, while profit before taxes will increase to 72 million.

The pence value of Funding Circle shares.

Additionally, a significant increase in cash balances is anticipated, from 101 million at the end of 2025 to 257 million by 2028. With a projected free cash flow yield of 15%, Funding Circle is trading at eight times pre-tax profits for 2028 after accounting for cash, according to these projections and a share price of 226p. For a company whose top line is expected to grow at a compound annual growth rate of over 20% for the foreseeable future, that is far too cheap.