Online lender's new target: Small businesses waiting to get paid
Lisa Fiore, the founder and CEO of LandscapeHub, a digital marketplace that connects nurseries and landscaping contractors with suppliers, sees up close the financing problems of small businesses.
Suppliers typically finance the buyers’ purchases. Companies on both sides are seasonal and therefore have cash-flow problems throughout the year.
“Often, suppliers are in no better position to finance than the companies they’re financing,” she said.
This problem is not unique to the landscaping business. David O’Connell, senior analyst at Aite Group, has similar memories of the company where his dad worked. It sold heating oil to businesses that delivered the oil to homeowners.
“The folks who did my father’s job lived or died on based on their ability to figure out whose money was good and whose was not good," O'Connell said. "You didn’t make money because you sold well, you made money because you were very good at being an ad-hoc banker to your buyers."
In home heating, sellers would finance buyers for 30 days. "Things have not changed at all since then," O'Connell said. "That’s 40 years of nonchange.”
The online small-business lender Fundbox says it has developed a credit and payment product, set to launch Wednesday, that could resolve such problems. It is an experiment that traditional commercial lenders and credit card issuers may want to watch closely.
According to Fundbox, it takes the average small business 21 days to get paid, 81% of small- business invoices are 30 days past due, and the value of small businesses' unpaid invoices is $825 billion — which is equivalent to 5% of U.S. GDP.
Fiore and O’Connell see promise in the new product, which is called Fundbox Pay.
“We want to do for [small-business] B-to-B commerce what the entire credit card infrastructure has done for B-to-C commerce,” said Prashant Fuloria, chief operating officer of Fundbox.
While credit cards have transformed the way consumers buy things, small-business commerce still happens the way it did 60 years ago, Fuloria asserts. Small businesses invoice their customers and get paid sometime later by check, automated clearing house or wire transfer.
One reason these payments have stayed the same is that there is no credit scoring system for small businesses, Fuloria said.
“There’s no simple way to assess a small business’s credit,” he said. Some lenders use the small-business owner’s personal credit history to evaluate the business’s creditworthiness. Others use bank account or tax return data.
Fundbox’s underwriting software pulls data from accounting systems, invoicing systems, payments (e.g. screen scraping from PayPal), public records, web interactions, social networks and tax returns. It uses artificial intelligence to assess the creditworthiness of the company and can render a credit decision in minutes based on the business’s incoming and outgoing invoices. Borrowers pay by the week for whatever credit they use.
Using the new Fundbox Pay product, a small business that has provided a product or service (a lawyer, say, or a construction company) puts in a request for payment and gets paid immediately by Fundbox. The seller pays a 2.9% transaction fee, in return for immediate cash flow and not having to worry about the buyer defaulting. (And if the seller has QuickBooks, Xero or other Fundbox-compatible accounting software, Fundbox can automatically generate requests for payment from the invoices created there, saving a step.)
Fundbox sends a request for payment to the buyer. If the buyer is not in the Fundbox network, it is encouraged to join. The buyer has 60 days to pay without charge. After the 60 days, if the buyer wants to continue to carry that balance, it can use Fundbox’s line of credit for up to 52 weeks at a rate of 0.38% per week. This is similar to the existing credit product. Once approved, the buyer can use that Fundbox credit with other sellers as well. Fuloria would not disclose how many companies are in its network.
“This product is filling a unique gap in the sense that these buyers are accustomed to accessing trade credit through suppliers,” Fiore said of her landscaping network. “It allows us to offer more attractive terms to customers, who may not have favorable access to credit.”
Dealing with deadbeats
One of the things credit cards do, of course, is take care of disputes—if the buyer says the goods never arrived, for instance, or is not happy with the service provided, the card networks can facilitate chargebacks. Fuloria said his company is careful to check for any fraudulent activity on the part of buyers and sellers and does not accept responsibility for the quality of the product or service.
“We’re merely a way to pay,” he said. Fundbox is also growing its network carefully, Fuloria said.
If the buyer never pays, Fundbox has a collections process that starts with gentle reminders and escalates into formal collections from a third party.
The new Fundbox Pay has been in beta for several quarters, Fuloria said.
“It’s a really sticky product,” he said. Once buyers and sellers start using it, retention is very high, he said.
The biggest competition to Fundbox Pay, according to O’Connell, will come from business credit cards.
“If the banks that extend credit cards to small businesses really go after this, that will be tough competition," he said. "But that’s going to take a while because banks are going to have to change what they do. Because there’s a credit mismatch. When banks extend business credit cards, they’re typically doing it based on the creditworthiness of the principal of the business. Banks change their products and culture relatively slowly.”
Editor at Large Penny Crosman welcomes feedback at firstname.lastname@example.org.