P2B-, SME- online loans and Factoring
New technology has fuelled the growth of alternative lenders which offer both higher yields to investors and faster, cheaper, more convenient loans for borrowers than traditional banks. Private investors are continuing to plow hundreds of millions of dollars into alternative-lending startups at valuations of more than $1 billion.
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Much of the success of Working Capital is owed to the fall of the banking system during the 2008 financial crisis. Small businesses are still down 20 percent from the great recession, with many struggling to find access to capital from traditional bank loans. As a result, alternative lending systems such as Working Capital have flourished due to their departure from all the old guard red tape.
Small businesses are often in need of quick capital that can’t be accessed through traditional bank loans or credit cards. The 2008 financial crisis left hundreds of thousands of small businesses with pent-up demand for working capital to grow their businesses. Only 2.4 million traditional loans were originated to businesses with $1 million or less in revenue in 2013, down 54% from 2007. Following the 2008 financial crisis, banks severely restricted access to capital, disproportionately affecting fledgling and medium-sized businesses. Annual loan originations to businesses with $1 million or less in revenue fell dramatically between 2007 and 2013.
For new players this created an opportunity. They are now offering loans and advances to their small-business clients. To fill this niche, a handful of start-ups and payments companies are now offering small businesses a financing opportunity that works like an advance on sales.
Just as the convergence of technology and money has created a land rush of alternative finance players offering loans and cash advances, so too have companies sprung up in this long-overlooked area of providing capital off of unpaid invoices. While each of these companies takes a somewhat different approach to providing capital based off of invoices, for cash-pressed small businesses they’re all attacking the same problem. In the United States, these invoices represent a $72 trillion market.
More than £1bn has been lent to small UK businesses through Funding Circle since the company was launched in 2010, demonstrating the rising popularity of alternative lending among consumers. The peer-to-peer lender matches investors – ranging from individuals to local authorities to financial institutions – with small and mid-sized companies seeking loans. Investors lent £500m through the markeplace lender during 2015. The company expects a further £1bn to pass through its systems during 2016.
Funding Circle claims it is cheaper and quicker to approve a loan through its systems than from a traditional lender because it bypasses “inefficient” banking processes. “Over the last five years, the Funding Circle marketplace model has proved to be a more efficient way for businesses to access the finance they need to grow and expand,” said James Meekings, the company’s UK managing director and co-founder. He said more than 12,000 British companies had used the platform during that period.
Funding Circle, which has operations in the US, Germany, Spain and the Netherlands, said its investors included 45,000 individuals, the government-backed British Business Bank, 19 local authorities, Huddersfield University and a wide range of financial institutions. They have lent $1.8bn to 15,000 businesses globally. The company made a loss of £19.4m on sales of £13.1m in 2014, the latest year for which figures are available. It expects sales to triple in 2015 to almost £40m, and anticipates that its UK division will turn a profit in 2016 – though its international businesses and the company as a whole will remain loss-making.
In November 2015, Funding Circle launched its own investment trust after raising £150m from a group of institutional investors to focus on loans to small businesses. Rather than invest in loans directly through a P2P platform, individual and institutional investors can buy and sell shares in the vehicle, which will manage a selection of loans on their behalf. Funding Circle, the peer-to-peer lender, has listed its small business investment trust on the London Stock Exchange, bringing crowdfunding to the wider investment community for the first time. The trust is targeting a dividend yield of about 7pc a year. It is eligible for self-invested personal pensions and tax-free individual savings accounts.
In October 2015, Funding Circle acquired rival funding platform Zencap, which lends to small businesses in Germany, Spain and the Netherlands, to facilitate the expansion into Europe. Zencap launched 18 months ago before the date and has so far lent more than 30 million euros ($34 million) to around 500 businesses. Financial details were not disclosed.
In April 2015, Funding Circle raised $150 million in venture funding, in a round that we have confirmed values the startup at over $1 billion. This latest round was led by DST Global, with participation also from Baillie Gifford, a fund managed by BlackRock, Sands Capital Ventures and Singapore’s Temasek. “We are delighted to support Samir and the team at Funding Circle as they continue to grow and deliver value to both sides of their marketplace,” said Yuri Milner, founder of DST Global in a statement. DST has backed a wide range of other huge Internet companies and those that look like they are on their way to being huge. Of the $65 million it raised last summer, the “vast majority is still on the balance sheet”.
Additionally, it’s announced some key appointments to bolster its growth. David Yu, formerly the CEO and CTO of online betting business Betfair, is Funding Circle’s new chief product officer. It has also appointed Chitra Nayak, previously COO of Salesforce’s Platform business, as its U.S. COO.
CEO said that about 2% of Funding Circle’s loans “go bad” each year, but overall investors are seeing returns of 7% on their investments in the UK, and 10% in the U.S. Interest rates are not drastically different from what a customer might see from a bank loan — anything from 6% to 20% Desai says — but the key difference is simply that the business may get the money using Funding Circle, when it might not be so lucky with the bank. Funding Circle makes income by taking between 2% and 5% from the borrower, and 1% per year from lenders, largely for a servicing fee.
This is one of the largest funding rounds for a startup out of London, and for a lending platform anywhere. Other notable fintech fundings out of Europe include WorldRemit, which picked up $100 million in February, $58 million for TransferWise, and Kreditech’s $40 million. Funding Circle has now raised $273 million to date, with other investors including Index Ventures, Accel Partners, Union Square Ventures and Ribbit Capital.
“Rather than selling direct to customers, eBay connected up thousands of people across the world to enable them to transact themselves,” says Desai. “It led to better priced goods, and people actually finding what they were looking for.” Uber, Etsy and Airbnb have all seen their popularity (and revenue) rocket by following the same model. “The biggest thing is that a lot of these companies don’t have specific goods — Alibaba, the world’s biggest retailer, has no inventory; Airbnb doesn’t have any hotel rooms; Facebook doesn’t create its own content.
These markets connect up thousands of citizens but create nothing beyond their network.” “We have no balance sheet or risk ourselves, we connect up lenders and borrowers.”
The lending marketplace is only set to boom further, Desai predicts, pointing to Morgan Stanley projections that see it hitting $290bn by 2020. Using data to continue to accurately price risks on those marketplace will be key. But also their uptake within other disruptive marketplaces.
Kabbage Inc. raised $135 million at valuation of more than $1 billion. Reverence Capital Partners, a private investment firm focused on financial services companies, led the Series E round, with participation also from several of the world’s biggest banks: Holland’s ING, Spain’s Santander (via InnoVentures), and Canada’s Scotiabank. “Kabbage has been able to triple the size of their business during the past few years while bringing down the cost of customer acquisition,” said Reverence Managing Partner Milton Berlinski, who has agreed to join the Kabbage board. He said Kabbage has been able to reduce loan origination fees to less than $1,000 and, thanks to some yet-to-be announced joint ventures, will soon be able to slice that number to just a few hundred dollars.
For Kabbage, which says it is on track to generate more than $100 million in revenue this year, almost all its business is from small and medium-size businesses. By pulling data from social networks, accounting data, online sales, shipping and dozens of other private and public sources, Kabbage extends loans ranging from $2,000 to $100,000 to businesses in as little as seven minutes.
Like competitors Funding Circle Ltd., which have raised late stage rounds at valuations of more than $1 billion this year, and OnDeck Capital Inc., which is trading below IPO prices, Kabbage uses big data and automated underwriting to extend loans more quickly and easily than many traditional lenders.
The startup based out of Atlanta has raised a Series E of $135 million, and expanded its credit facility — the money it has on hand to fulfil loans — to $900 million. The $900 million credit facility expansion getting announced today comes from a completely different mixture of banks and other financial groups, and no overlap with Kabbage’s equity investors.
Rob Frohwein, Kabbage’s founder and CEO, said in an interview that the investment will be used to expand the company’s business deeper into consumer lending, as well as internationally. Its consumer Karrot platform was launched last year to complement Kabbage’s primary loans business focused on online merchants and other SMBs. “We’re at the precipice of a large expansion of Karrot,” Frohwein says. Today it represents 10 percent of our business and will be between 25 percent and 30 percent of our business by next year.”
The fact that the investor list has so many international banks is significant for Kabbage’s future business: the company is going to use its funding to take its platform to several new markets in Europe and elsewhere, in partnership with its new backers. First up will be a product in Spain, aimed first at businesses and then individual borrowers, with further launches planned across Europe a month from now. Now the banks are sitting up and taking notice and hoping to tap into what these startups have built, rather than trying directly to replicate it themselves.
To date, the company’s biggest revenue drivers have been around taking a percentage interest on the loans completed on its platform, as well as through licensing fees. Kabbage offers its tech as a white-label platform in Australia, for example, and there are plans to ramp up those kinds of partnerships significantly in the future. The company is on track for $100 million in revenues this year.
Kabbage made the list of Most Innovative Companies in 2013 for a simple reason: helping small and medium businesses get cash fast. Kabbage will use the money to supercharge its R&D and expansion plans, as well as expanding its credit debt limit. “Every market has a different need for a product. In some cases it’s a line of credit, or a credit card, or what have you, so the ability to deliver any type of product to any type of customer is where we need to be,” says Petralia. “We can do a lot of that, but not every market conforms the product to meet our exact needs. We’re developing to create a flexibility that is not only able to serve markets but execute very quickly.” Kabbage hopes to expand into countries in Europe, Latin America, and Asia (specifically India), as well as Canada. These improvements and global expansion won’t require greatly expanding Kabbage’s workforce, explains Petralia. Software development and expansion simply cost money.
OnDeck Capital fourth-quarter results disappointed investors, sent them racing out of its stock, and also weighed on the shares of the company’s other main publicly-traded competitor, LendingClub. OnDeck’s stock fell more than 20% to $6.77, and LendingClub’s shares fell 4% to $8.86 in recent trading at the moment.
While the two companies operate using different business models, they are part of a nascent group of financial technology companies engaged in specialty lending. The companies were the first to tap the public markets and are so far the only ones. While they were initially well received by investors. Public investors have grown increasingly wary of both stocks.
Canaccord Genuity analyst Michael Graham called OnDeck’s fourth-quarter results strong, but said that the sell off in the stock “despite this operating momentum implies to us that investors fear a cliff is coming either in borrower or lender adoption of the platform.” Mr. Graham says he’s more optimistic than investors about OnDeck’s prospects. Concerns about a potential recession have weighed on both OnDeck and LendingClub’s stocks this year. OnDeck Chief Executive Noah Breslow said the company isn’t currently seeing any weakness in its loan quality.
OnDeck’s shares are down more than 65% from its December 2014 initial public offering price of $20 (FT Partners published their interesting study of (the second fintech) IPO of online SME lending service “OnDeck IPO: Post Quiet Period Review”), while LendingClub is off more than 40% from its $15 IPO price. Both companies debuted in December 2014.
According to reports (Feb. 24, 2015), Wonga Group revealed plans to cut its workforce and nix its small business lending operations. A total of 325 jobs will be eliminated, the company said, amounting to more than one-third of its workforce across the UK, Ireland, South Africa and Israel. It plans to close its Tel Aviv location altogether by the middle of this year and shutter the doors of its Dublin location by mid-2016. Overall, Wonga said it will look to reduce costs by as much as £25 million by 2017. The restructuring efforts are part of the lender’s decision to refocus on short-term loans for individual consumers, the company said.
More unravelling for Wonga, that previous year had to write down £220 million ($340 million) in unpaid loans. The company announced that it has also sold Everline, its small-business lending arm, to Orange Money (trading as Ezbob). On top of that, former Wonga chairman Robin Klein of Index Ventures has stepped down from the board of the company. Klein’s place on the board will be taken by Simon Allen. He’s joining a board that also includes Wonga’s CTO Paul Miles, UK CEO Tara Kneafsey, and two additional non-executive directors yet to be appointed, the company says.
The financial terms of the sale of Everline have not been disclosed, but it is a small portion of Wonga’s overall business. Orange Money — no relation to France Telecom’s Orange — says that together the two have lent over £54 million ($83 million) since 2012, covering about 5,000 businesses.
The services both use online algorithms to assess the creditworthiness of a potential borrower, not unlike Kabbage out of the U.S. (Kabbage, Kreditech and other online loans businesses use an algorithm that incorporates “signals” from variety of sources like online bank accounts, e-commerce histories, social media and more to determine how likely a borrower may pay back or default on a loan.)
Now Orange Money will use the combined power to raise the ceiling on loan amounts, which can now be as high £150,000 on 18-month terms, versus £50,000 on 12-month terms. Rates will also be coming down, the company says. The company will be keeping on Russell Gould, who had been the MD of Everline, as the new COO of Orange Money.
Why Square and PayPal overtop traditional banks in SME lending
PayPal said its small business lending program Working Capital has disbursed $1 billion in loans to more than 60,000 PayPal merchants in US, UK and Australia. The milestone follows a string of substantial growth metrics for Working Capital since its inception in 2013. Previous year, PayPal announced the program was distributing $1 million in loans each day, whereas now it’s loaning $100 million each month. And it was less than 6 months ago since PayPal said the program had doled out roughly $500 million in total small business loans.
Because PayPal operates within a closed system, borrowers can secure funds without the traditional credit check and mountain of paperwork. Instead, PayPal is able to peak into a merchant’s sales history and the number of unique customers it brings in each month. If all the numbers line up, a merchant can have funding deposited instantly into their PayPal account.
From there, PayPal is able to remain closely involved in the repayment process. Repayment is taken directly from PayPal sales coming over the network, with the merchant given the ability to select a rate of repayment. So essentially the funds are just taken out automatically to pay down the loan.
Working Capital is a small but important part of PayPal’s strategy to offer additional services to its small business customers and to strengthen the PayPal ecosystem. Working Capital is only available to existing PayPal merchants who have been processing payments via PayPal for at least 90 days and have processed at least $20,000 in the past 12 months. The company is able to speed up the application process — to as little as a few minutes — because it leverages insights based on the relationship it has with merchants to assess creditworthiness.
Most of PayPal’s customers using Working Capital have been with PayPal for multiple years, so the company has an extensive set of proprietary data to leverage. Merchants can borrow up to $85,000, or up to 15 percent of sales processed over the PayPal network over the past year. PayPal charges a single fixed fee that varies depending on how fast the merchant plans to repay the loan. If approved, the money is deposited into the merchant’s account instantly. Loans are then repaid as a percentage of sales with merchants choosing to pay off 10 to 30 percent.
In terms of competing programs, Square Capital is probably the most well known – albeit significantly smaller. In August 2015 Square said the small business lending program had extended more than $225 million in financing to Square sellers since May 2014, with more than $1 million going out each day.
Those numbers put Square far below PayPal, but the program is still relatively young, and given its progression metrics and investment backing, it could easily become a more challenging player over time.
Square Capital buys part of your future receivables and gives you a lump sum in return. In order to qualify for Square Capital, you need to be a Square merchant—they determine your eligibility from your Square history and payment processing volume. Go into your Square Dashboard and, if you’re eligible, you’ll see the Square Capital page with a link to “View Your Options.”
Essentially, you’re getting invited to apply based on information the company already has about your sales history, making the application process quick and easy. If you’re approved, those funds can get deposited into your business bank account as early as the next day. The cost of capital is based on your total card sales, and repayments are made automatically as a fixed percentage of your daily payment card sales.
As with PayPal’s, this repayment method offers great flexibility: On days when your sales are lower, you pay less, and on days when your sales are higher, you pay more. Working capital between $2,000 and $50,000 is available, although the average amount borrowed is $10,000. Once the loan gets paid back, you can apply for a new one.
When you’re a small business owner seeking capital, being able to get financing from a source you know and trust is a big plus. These two popular payment-processing services that many small business owners rely on now offer small business loans, too. There’s not a lot of difference between Square Capital and PayPal Working Capital, but PayPal does have an advantage in some areas.
Merchant Cash Advances have become very popular among micro-businesses because they are the only working capital financing option available to them. A cash advance is typically the equivalent of borrowing at a 30–70% interest rate-or even higher. A Merchant Cash Advance is a distinct lending product that (1) is not technically a loan, (2) doesn’t build business credit, and (3) carries a “fee” on the principal amount rather than the interest rate of a traditional loan.
Where a bank loans $1,000 at 10% interest, Kabbage, for example, will loan you $1,000, and demand repayment of the $1,000, plus a 10% fee, totalling $1,100. Kabbage requires payback in 6-months, but the fees are front-loaded in the first 2 months. PayPal and Square take a percentage of sales until the advance is repaid.
So what does this mean for small businesses? Merchant Cash Advances are expensive forms of loans. When a business borrows money at such a high effective interest rate, they should only use the money to fund projects/products that produce even better returns. Growing a business under the burden of 50% interest is very difficult. But they do serve a purpose: Many businesses take these cash advances because they aren’t eligible for any other forms of credit.
So it’s ok for them to take an advance, as long as they understand the true cost. But Small businesses should know the alternatives: When weighing a loan at an effective interest rate of 30% or 50%, credit cards look very cheap, although hidden fees can easily wreck that logic. There are also numerous other well-known lending platforms like CAN, Lending Club, Amazon Lending, OnDeck, and Funding Circle, that offer various loan (and merchant cash advance) products.
It’s also important to note that cash advances have downside protection. Customers benefit from two main elements: (1) Merchant cash advances are not technically loans, so if you pay late-or not at all-it won’t necessarily ding your credit. (2) For cash advances that are paid back using a percentage of sales (Square & PayPal), if your sales drop, you pay less (and your effective interest rate drops).
In a new BI Intelligence report, you can find how these digital-lending programs work, how they stack up to alternatives, and why banks should be worried about these programs taking off. The programs are most competitive with credit cards and banks loans. Though the equivalent annual percentage rate (APR) of these programs tends to be higher, they help merchants save time, the terms are clear, and repayment is automated. Merchants often value these features enough to pay what equates to a premium. But without access to capital, it’s difficult for a business to grow.
Both companies are seeing more pressure on their primary card-processing businesses as new entrants such as Stripe gain market share. Capital lending offers a high return without extensive startup costs. Banks should be worried. These programs compete with existing banking products, including credit cards and bank loans. Even though these programs tend to be more expensive than loans and lines of credit, a large group of merchants turn to them because they can gain access to financing more quickly and easily and because the repayment schedule tracks their business performance.
Three more in US: AMP, Lendio, Fundera
In March 2015 Advanced Merchant Payments (AMP), a company that provides banks technology to offer loans to their small business customers, pulled in an undisclosed amount of funding today from Route 66 Ventures. The new installment is a follow-on round to the $5 million Series A round received in November 2014 from SBT Venture Capital.
Hong Kong-based AMP enables banks and merchant acquirers to originate and manage small business loans. The loans are made to serve small businesses that are too large for a consumer loan and too small for a traditional small business loan. AMP, which operates in Hong Kong, Singapore, the Philippines, and the United Kingdom, debuted its small business lending solution for banks at Finovate Europe 2014.
Small business lender Lendio announced in March 2015 that it has raised $20.5 million in new funding. The round was led by Napier Park’s Financial Partners Group, and included participation by: Blumberg Capital, Highway 12 Ventures, North Hill Ventures, Pivot Investment Partners, Runa Capital and Tribeca Venture Partners. The new investment takes Lendio’s total funding to more than $30 million. As part of the agreement, Dan Kittredge from Napier Park and Chris Gottschalk of Blumberg Capital will join Lendio’s board of directors.
Lendio plans to use the capital to expand its partnership program, help grow its team of loan advisors, and fuel continued innovation of the platform. The company was founded in 2005 and is headquartered in Salt Lake City, Utah. Lendio believes that a big reason why small businesses get turned down when applying for loans is a matter of proper matchmaking.
Whether the small business is pursuing the wrong type of loan product, or has found the right loan but at the wrong bank or credit union, the result is the same. Lendio’s platform makes it easier for qualified borrowers to find the loan that best suits their needs from the financial institution best able (and willing) to service it. Businesses are able to make these loan inquiries without penalty to their credit rating due to Lendio’s “soft pull” of personal and business credit data.
“Our focus is to provide three essential benefits for the business owner – offer a wide variety of loan options, speed up the process, and reduce the time and effort it requires to get funded, and provide a white-glove, trusted experience, Lendio CEO Brock Blake said. For banks and credit unions the reward is lower customer acquisition costs, more qualified leads, and a significantly larger potential market for new customers.
Fundera, the lending match-maker for SMBs, has helped secure funding for over 300 small businesses, with more than $12 million in loans funded. The company originally launched in February 2014 as a service that paired SMBs looking for a loan with the lenders who could help them out. In the beginning, it was simply a matching service, but over the course of 2014 the company has transformed into an end-to-end product that handles every step of the process. On average, it takes about 16 days for a company to get started on Fundera and secure funding. The company was founded by GroupMe founder Jared Hecht after his cousin, a restaurant owner, was having trouble securing a loan for his business. Looking to simplify the process, Hecht went from the messenger business into the world of finance. Fundera makes money by taking a 1.5 percent to 3 percent transaction fee for each loan that successfully goes through. In February 2015, Fundera received $3.4 million in funding from Khosla, First Round Capital, Lerer Ventures, SV Angel, and various angel investors including Strauss Zelnick, Rob Wiesenthal, David Rosenblatt, and David Tisch.
Lending Club (US) is pushing further into the small business lending sector
The largest marketplace lending platform in the US, announced a new “multi-draw line of credit product” designed to give SMEs convenient, flexible and affordable credit. Lending Club has built is online lending business by providing consumers fast, low cost loans but the platform sees big opportunity in lending to business.
Lending Club CEO Renaud Laplanche believes small business owners currently do not have access to “affordable and transparent credit”. “Our platform’s new multi-draw line of credit product gives them a predictable, flexible, low cost way to access credit ‘on demand’ if and when they need it,” states Laplanche.
Lending Club explained it has been beta testing the product over the past few months to fine tune the feature. Lending Club launched a term loan for small businesses in 2014. The line of credit is similar in that businesses can apply for a line of credit and see if they qualify in minutes, with no impact to their credit score. To qualify, they must have been in business for two years and be able to show revenue of at least $75,000 annually.
What sets the line of credit apart is instead of receiving a lump sum all at once, and paying interest on it from the beginning, business owners can draw what they need at that time, thus potentially reducing their interest cost. There are no fees or costs to open the line, which ranges from $5,000 to $300,000. Instead, businesses pay a 1-2% fee when they draw on the line. Lending Club piloted the product with Alibaba.com and Ingram Micro customers, and is now making it available to all qualified small businesses. Interest rates start at 6%.
Lending Club announced in March 2015 it is piloting a program that will enable Google to invest its own capital in its network of 10,000 partners by purchasing their loans. This differs from Google’s other investment arms, Google Capital and Google Ventures, as the partner investment program will offer capital without taking equity. The partner network consists of resellers, consultants, and system integrators that help Google distribute its applications and services.
To be eligible for funding, Google partners must be based in the U.S. and meet certain requirements. Qualifying partners can get loans of up to $600,000 for a two-year term. This six figure amount is double the $300,000 cap that Lending Club typically places on qualified small business borrowers. Also, while the interest rate for SMBs borrowing through Lending Club starts at a fixed 5.9%, those who take out loans through Google Partners will pay only interest the first year, and pay back the loan on an amortized schedule in year two.
China: Alibaba activities for SMEs
Alibaba Group Holding Ltd’s financial affiliate launched in June 2015 Internet bank MYbank, targeting the small- and medium-sized Chinese enterprises that have struggled to obtain credit from major financial institutions. MYbank, which is 30-percent owned by Alibaba-linked Ant Financial Services Group, has 4 billion yuan ($644 million) of registered capital and will offer loans of up to 5 million yuan ($805,503), it said in a statement.
“MYbank is here to give affordable loans for small and micro enterprises, and we are here to provide banking services, not for the rich, but for the little guys,” said Eric Jing, Executive Chairman of MYbank.
MYbank’s target clientele means it will pose little immediate threat to China’s big state-owned lenders, who have seen deposits eroded by Alibaba-related wealth management product Yu’e Bao, which his now China’s biggest money-market fund. The Internet bank said its lower overheads from operating online allowed it to offer more competitive interest rates, compared to the bigger banks.
Credit conditions have remained tight for SMEs, despite a series of policy easing, as banks avoid the companies worst hit by an economic slowdown. State-owned banks have also avoided customers such as farmers and smaller businesses because of the difficulties in assessing their credit worthiness and they have little to offer as collateral.
Ant Financial has said it will use its Sesame Credit arm, which analyses data from its payment processing arm Alipay and Alibaba’s e-commerce sites to assess risk and price loans for MYbank customers.
Alibaba has entered into a partnership with more than 25 credit rating agencies and banks globally, in order to make cross-border trade financing available for Small and Medium Enterprises (SMEs). The Chinese e-commerce giant is also aiming to introduce a new credit reporting service. “The move comes as the company continues to ramp up its business-to-business (B2B) ecosystem globally by cooperating with offline industries,” reports South China Morning Post. At present, Alibaba will provide loans only to Chinese SMEs to finance cross-border transactions.
Alibaba is also planning to launch its self-structured rating website, to be known as “credit.alibaba.com.” The platform is set to be launched at the end of 2016. Through its own rating platform, Alibaba will rate Chinese suppliers who will join the company. Sophie Wu, President Alibaba B2B business unit told South China Morning Post, “By building up the credit profiles of Chinese SMEs based on business-related data, Alibaba.com’s credit reporting service can help overseas buyers.”
In addition, Ms. Wu also indicated that the platform would help identify reliable trading partners and provide Chinese suppliers access to advanced financing options. “Credit rating at the rating platform will be determined by conducting an analysis of Alibaba’s big data, public records, and ratings from credit scoring firms,” she further added.
In February 2015 Alibaba.com and peer-to-peer financing site Lending Club have inked a strategic partnership designed to get more U.S. businesses to buy inventory from the e-commerce giant’s wholesale marketplace. The two will offer a new financial service called the Alibaba.com e-Credit Line that will let American companies apply for credit lines of $5,000 to $300,000 through the site, which they can then use to make purchases there. The two companies said their agreement is multi-year and exclusive.
In addition to capital, the Alibaba.com e-Credit Line also comes with a trade assurance, which allows buyers to open disputes and potentially get a refund if they receive goods that are late or don’t match listing descriptions. This is especially important because Alibaba is constantly faced with criticism that it does not do enough to prevent the sale of counterfeit goods on its site.
In June 2015 Alibaba teamed up with Australian alternative finance lender Capify to target small business lending to 1.9 million Australian customers. “The purpose of the collaboration with Capify is to increase traffic and encourage more people to buy things on the internet. We’re not competing with banks and we’re not trying to create competition here. Buying and selling is the core of our business. We want to make it easier to buy online anywhere, any time.” Mr Mang said.
The deal will allow Alibaba users to apply for an unsecured loan of between $5000 and $400,000 from Capify using an automated 60 second credit scoring model, at the factor rate ranging between 1.15 to 1.3. (Capify has provided more than $100 million unsecured loans in Australia since 2008, under the brand name of AUSvance.)
Since January 2015 Alibaba Group affiliate Ant Financial Services has unveiled a new credit-scoring system that uses data from the e-commerce giant’s sites to gauge users’ creditworthiness. Dubbed Sesame Credit, the new service is an example of how Alibaba’s reach in China goes far beyond online shopping. Sesame Credit’s scoring system, which is currently in beta, looks at data gleaned from the 300 million registered shoppers and 37 million vendors that use Alibaba Group’s marketplaces, including Taobao and Tmall.com, as well as payment histories from Alipay, an Ant Financial subsidiary and China’s largest online payments platform.
Sesame Credit then applies customer behavior analytics to figure out whether or not an applicant is eligible for a loan. For example, credit history can be measured through a user’s history of credit card and utility payments through Alipay. Data used from shopping websites indicate how often a buyer or vendors follow through on transactions and the quality of their interactions with other users. Ant Financial says that it will supplement data collected from Alibaba sites and Alipay with information from public agencies, financial institutions, and other merchants.
Sesame Credit users can check their scores, which range from 350 to 950 points, through Alipay Wallet, a mobile wallet app, or shopping sites that accept Sesame Credit scores. Sesame Credit chief data scientist Yu Wujie said the service is targeted toward users who “may have never obtained bank loans or applied for credit cards.
However, they might be active Internet users who shop online a lot, e-pay their utility bills on time, have a stable residential status and have been using their mobile phone numbers for a long time. We will take these and other factors into consideration when assessing consumers’ creditworthiness.” The credit-scoring system is an example of how the user data collected by Alibaba Group’s e-commerce business can be used to power other verticals. In addition to financial services, Alibaba’s hoard of data is used by its cloud computing subsidiary, logistics, and even health tech that organizes patient information for hospitals.
Tyro Payments (Australia)
Tyro Payments started business selling payment terminals to businesses. Now, the upstart believes it can challenge the banking oligopoly in one of Australia’s most challenging financial markets: small business lending
Backed by $100 million from prominent investors including Atlassian’s Mike Cannon-Brookes and Tiger Global, Tyro was granted a full banking licence in August 2015 after a decade processing payments.
Tyro chief executive Jost Stollmann said the company decided that it could use its data from 14,000 business customers (operating its payment terminals out of a total of 550,000 EFTPOS payment terminals) to take on the established banks in lending. Macquarie Research recently estimated there is about $60 billion of unmet demand for loans from small business.”
Our goal is to build the Tyro Bank that is cloud based, totally integrated and totally mobile and that provides awesome frictionless banking solutions. Tyro spent 12 years to establish itself as a tech player, and payment provider. Now we’re changing the game and we’re going to a very different level,” he said.
Tyro will not yet be able to call itself a bank but it can start taking deposits, which it can then lend. It needs a minimum of $50 million in equity to put in the application to name itself a bank and half of the $100 million is for that purpose. Some of the money will be used to hire software engineers. Mr Cannon-Brookes, who has been on the board six years, is providing about 10 per cent of the $100 million. Last year he said the size of Australian banks’ profits was an example of “insanity”.
He said on top of the significance of a fintech with a bank licence, the size of the money raised itself is a big deal. “It is huge for Australia, it is only the fourth [private raising] north of $100 million and it is the first tech deal in Australia for Tiger,” he said while boarding a flight from Detroit to California to head Atlassian’s US$3.6 billion ($5 billion) IPO roadshow.
He acknowledged that many other fintech small-business lenders had set up shop in Australia this year offering working capital loans but he said Tyro would be able to truly challenge the banks. “It is a bank, the cost of capital is completely different. We have fully government guaranteed deposits, we already have a huge acquiring business and we will be a full service bank. There’s not just cash flow, there’s lots of other sorts of loans we can offer.
New small-business lenders typically loan up to $250,000 on an unsecured basis at interest rates of between 15 and 40 per cent. Tyro processes about 5 per cent of all card payments – the rest are done by the big four banks.
It is unclear if Tyro has the automated risk assessment technology that is the claimed advantage of the new fintechs but Mr Stollmann said it had launched a core banking system a few weeks ago and will triple the number of software developers it employs from about 150 now to 450.
New York-based Tiger Global is a major tech investor. It counts Facebook and LinkedIn among its early-stage investments. TDM Asset Management is a $400 million plus fund focused on wealthy families.
A host of fintechs targeting loans to small business have cropped up in the past 18 months, including Prospa, Moula, OnDeck, Spotcap, Thincats, PayPal Credit and Kikka. But all of them are intent on working with the major banks because the banks have all the customers, distribution as well as the funding. The most recent example is Prospa, which is in the throes of forming a referral, and possibly funding, partnership with Westpac via an online pilot where Westpac customers are referred to Prospa.
Singapore: CapitalMatch and FundingSocieties
In August 2015 Singapore-based p2b-lending startup Capital Match has raised S$1 million (US$710,000) in a series A funding round. The round was led by international investment firm Innosight Ventures. Previous investors Crystal Horse Investments and CE-Tech Invest also participated. The deal will see Innosight Ventures partner Pete Bonee join Capital Match’s board of directors. “Most importantly, [the deal gives the company] a great network of potential lenders and partners in Singapore as well as experience in scaling up technology businesses,” Capital Match co-founder and CEO Pawel Kuznicki told.
Capital Match says it is making a difference for small- and medium-sized enterprises that have difficulty reaching out to banks and other traditional financing institutions for their borrowing needs. It enables P2P lending among individuals and businesses.
The startup provides an online platform where borrowers can submit their loan request, and prospective lenders can decide whether they want to extend the loan. Investors can expect a return of about 20 percent to 25 percent on their investment, according to the company. The startup handles the entire process, including payment processing, due diligence, debt collection, and investor updating.
According to Kuznicki, the funding will go toward ramping up the company’s tech and sales and marketing teams. This will allow Capital Match to increase its marketing efforts and advertising spend. It will also enable it to strengthen its product with additional protective measures for investors, such as insurance and trusted accounts. At that date, the startup has processed 12 loans for 11 borrowers, for an amount close to S$1.7 million (US$1.2 million). About 150 investors have committed their funds into loans, Kuznicki said.
Capital Match launched operations officially in February 2015 with the aim of helping local small and medium sized businesses obtain loans financed by individual investors. For now, it is restricted to Singapore registered businesses, and typical loan sizes range from S$50,000 to S$200,000, with tenures of 3-12 months, and interest rate of 1.5% – 2.5% per month. The company said it was targeting investors who wished to add a fixed-income return to their portfolio, and also diversify away from asset classes such as equities and real estate, even as it highlighted that the platform could produce monthly returns of up to 2 per cent with a short commitment of 3 – 12 months
“The SMEs we speak to tell us it is increasingly difficult for them to get loans from banks”, said Pawel Kuznicki, an ex-management consultant formerly from Rocket Internet, who co-founded the company with Kevin Lim, an ex-investment banker and Arnaud Bailly, a software engineer. Prior to this, Lim has had stints with JP Morgan, Macquarie Capital and Standard Chartered, while Baily had been with Murex.
“P2P lending will provide a much needed source of alternative financing for our local SMEs. We chose to start our operations in Singapore because of the robust regulatory and legal framework, but we have ambitions to grow regionally”, Kuznicki added. According to Lim, ‘banks do not see P2P lending platforms as competition, but rather filling a gap in the banking ecosystem’.
Singapore is also home to loan crowdfunding platform Moolahsense (see capters about crowdfunding and crowinvesting) and P2P lending startup Funding Societies. Funding Societies is a peer-to-peer (P2P) lending marketplace for small-medium enterprises (SMEs) to get loans to grow and investors to get good returns in Singapore. Since their launch in June, they have crowdfunded ~3M SGD (approx. 2M EUR) in loans to 35 SMEs with 100% repayment.
The founder of Funding Societies would raise a few eyebrows in the financial industry. Still in his twenties, Kelvin Teo studied at Harvard Business school and worked for McKinsey and KRR Capstone before leaving the corporate sector. “Our interest rates are just a few percent higher than banks’, to minimize adverse selection. We charge 9% to 14% simple interest and pass the full return to investors with only 1% service fee. With diversification, we believe investors can earn at least 7%, much better than deposit interest of 0.05% in Singapore.”
India: Capital Float and Aye Finance
Capital Float, a financial tech startup that wants to make it easier for small businesses in India to get loans, has raised a $13 million Series A led by SAIF Partners and Sequoia Capital. Existing investor Aspada also returned for the round. Founded in 2013 and based in Bangalore with offices in New Delhi and Mumbai, Capital Float has raised a total of $17 million to date, all within the past twelve months.
Capital Float will use its Series A to expand into more cities, improve its tech platform, and launch new products. The company is also using its equity to finance loans, but plans to open up to other sources of capital by partnering with banks and individual investors. It makes money through a combination of interest and fees.
At that date, Capital Float has loaned more than $6 million to small businesses in 12 Indian cities. Its founders, Gaurav Hinduja and Sashank Rishyasringa, said they became interested in financial tech while studying for their MBAs at the Stanford Graduate School of Business. “The number of applications it processes increased by 10 times in 2014, with Capital Float now receiving about 200 loan requests per month. About 20 percent to 30 percent of applicants are approved after the platform accesses their suitability based on 2,000 data points.”
In addition to the usual metrics, like credit bureau scores, Capital Float’s technology scores applications based on online data, including customer feedback and transaction history from online marketplaces. It also does psychometric assessments: in other words, applicants are asked questions to judge things like their ability to scale a business, attitude toward credit, and how they compare to competitors.
Capital Float’s use of data from online sources, including e-commerce marketplaces, is similar to the system developed by Alibaba affiliate Ant Financial for its new credit-scoring system, called Sesame Credit. Like Ant Financial, Capital Float is also tackling the problem of financing entrepreneurs in countries with fast-growing industries, such as e-commerce, that are underserved by traditional financial institutions.
Rishyasringa says that formal lending institutions in India provide $140 billion in loans to small businesses each year, but there is still a funding gap of $200 billion dollars.
He adds that there are currently about 30 million small-to-medium businesses in India. Together they employ a total 69 million people and many are based in smaller cities, which Capital Float plans to expand into. Businesses that have a hard time securing capital from traditional banks end up turning to friends and family or private moneylenders that can charge interest rates of more than 40 percent, making loans difficult to pay back. Capital Float founders say it offers interest rates similar to banks, or about 16 percent to 18 percent, but a much faster application process.
Other Indian lender Aye Finance bagged US$1 million in funding from SAIF Partners and Accion. This is the second such investment by SAIF Partners. Founded by veteran bankers, Sanjay Sharma and Vikram Jetley, six-month-old Aye Finance has financed over 300 micro businesses in diverse industries, including textiles, auto components, and even leather products. It has four branches in north India.
According to a report by Intellecap and the International Finance Corporation, the debt gap for MSMEs in India is estimated to be US$198 billion, and is increasing at 11 percent per year. India has a huge micro, small, and medium-sized business (MSMB) market base, which at 47 million is second only to China’s 50 million. “Too small for commercial finance and too large for traditional microfinance, these entrepreneurs must make do without the working capital they need to expand their businesses, buy bulk materials, or hire new employees. Aye Finance will address that “missing middle,” providing borrowers with the capital that all businesses need, no matter their size,” says Accion CEO Michael Schlein in an announcement on the funding.
Factoring in US: Fundbox, KickPay, BlueVine and C2FO
Fundbox, a company that loans businesses money for outstanding invoice payments, has raised $40 million to grow its own business in the trillion-dollar alternative lending market. The Series B round was led by General Catalyst with participation from NyCa Investment Partners and help from existing backers Khosla Ventures, Shlomo Kramer and Blumberg Capital.
Fundbox provides short-term loans so businesses can keep up with expenses while they’re waiting the 30, 60, or 90 days it typically takes for invoices to be paid.“There’s an increasing trend that invoices actually get paid over longer and longer periods of time, and cash flow management is now the number one reason these businesses go out of business,” says Hemant Taneja of General Catalyst, who is joining Fundbox’s Board of Directors.
Fundbox plugs into the existing accounting software a small business is using and analyzes a variety of data points to build a risk profile for each invoice. One company’s account receivable is another’s account payable, so Fundbox looks at both sides of the equation to assess risk. Founder and CEO Eyal Shinar says it takes 15 seconds to create an account and 50 seconds for Fundbox to underwrite an invoice. Customers see the money in their account the next business day, and they’re rewarded if they pay back the loan before the invoice is due.
Fundbox is currently powering tens of thousands of small businesses in the U.S. and advancing thousands of invoices weekly, ranging from $100 to $25,000 each. Shinar says Fundbox has surpassed 300% quarter over quarter growth in the past 18 months, and he plans to use the latest influx of cash to pick up the pace.
Scenarios like Fundbox are where Kickpay, a startup that is graduating from Y Combinator‘s latest batch, hopes to make a difference. Kickpay’s service is essentially a secondary market for invoices. Companies, and in particular more-financially conscious SMEs and startups, post details of confirmed invoices which are sold to investors who can get a quick return on their money.
The arrangement gives the seller most of their capital upfront — avoiding the painful, often critical, wait for funds — while Kickpay claimed an investor can get a ‘double-digital’ return on an annual basis.
Kickpay plugs into a company’s Quickbooks or banking software to make pushing invoices out to its marketplace quick and easy. The service uses “market dynamics and a sophisticated data model” — via a partnership with Wells Fargo — to generate its rates. “Investors can make 1.5-2 percent per month,” he explained. “It’s not like a normal loan: they’re betting on when Costco will pay out, which has less risk than an SME paying back over a two-year period, for example.”
A primary objective is to make things super easy for investors, matching them with the right companies quickly and minimizing the steps they take when investing. Right now, Kickpay takes no fee but McCalister said it will, in time, take a cut from both companies and investors. The exact size of that is still to be decided.
If you’ve never used a factoring company, you’re probably only vaguely aware of their existence as a way to get capital off receivables, and if you have used one you may well be unhappy with that experience. Factoring gets a bad rap, and the liquidity it provides can be costly. But the market is changing fast. Online players like BlueVine, Fundbox and C2FO are transforming the market of new invoice financing too.
Eyal Lifshitz cut his teeth at Greylock Partners doing venture capital deals in Israel and Europe. Lifshitz started researching factoring – the business in which cash-strapped businesses sell their invoices to a third party at a discount – and came up with an idea for doing invoice finance online. In March 2014, he launched BlueVine with the aim of bringing factoring into the modern, digital era. Today, the Palo Alto, Calif.-based company, which is backed by 83North (formerly Greylock IL), Lightspeed Ventures and others, has funded between $50 million and $100 million in invoices. “Invoice factoring has existed since Babylon,” Lifshitz says, “and it is an area that has not been innovated at all.”
San Francisco-based Fundbox, which launched in 2012 to offer working capital to business with unpaid invoices, just announced that it added Amazon CEO Jeff Bezos and early Twitter-investor Spark Capital to an investor lineup that includes Khosla Ventures and Blumberg Capital.
And C2FO, in Kansas City, has created a marketplace to bring together big companies willing to pay their suppliers’ invoices earlier for a discount with those businesses that need the cash. Jeff Bezos, chief executive officer of Amazon.com, just invested in Fundbox, an online invoice finance company. Fundbox and other online players like BlueVine and C2FO are transforming the age-old business of getting capital off receivables.
C2FO, founded in 2008, is a somewhat different beast that addresses the same issue: It’s created an online marketplace where companies with cash on their balance sheets willing to pay invoices early can come together with their suppliers who need that cash. Buyers on the platform include Costco, Amazon, Walgreen and Nordstrom, and many other large companies.
“These alternative lenders are coming in with third-party capital to try to take up some of the slack in the lack of traditional lending by banks,” says John Kill, C2FO’s senior vice president and chief financial officer. “We think there are better and more efficient ways to do it. Their rates are never going to be able to compete with ours.”
While pricing is set by the marketplace, rather than by C2FO, Kill says, “we’re typically seeing APRs, not discounts, in the 4% to 6% range.” So, for example, a business owner might want to accelerate a 60-day invoice to 30-days at a 50 basis point discount. While some business owners may feel uncomfortable asking their buyers to accelerate payment for a discount, Kill notes that these arrangements are already happening offline. In fact, with payment terms getting longer and longer, some of those static discounts – such as 2% off to get paid in 120 days instead of 160 – are, as he puts it, “just ridiculous.”
As the alternative finance field gets more crowded, it seems likely that invoice financing won’t stay its own little area for long. “We’re more similar in philosophy to OnDeck and Lending Club and Kabbage than to a traditional factor,” says BlueVine’s Lifshitz. “I think you will see more players like us, and you’ll see some of the leading online lenders going into his space as well. The big guys are very familiar with the space, and it’s one of the growth areas.”
Life.SREDA VC is a global fintech-focused Venture Capital fund with HQ in Singapore