Can alternative credit reach an untapped $4.5 trillion B-to-B market?

Small-business payments are an inefficient mess of unpaid invoices and paper processes that are causing substantial funds to languish and companies to stagnate. One possible solution is to address the cash flow, not the payment mechanism itself.

"The root cause is small businesses get paid late," said Prashant Fuloria, CEO of Fundbox, a San Francisco-based business intelligence and payments company.

Fundbox is formally launching a payment and credit product that's designed to grab a share of the B-to-B market that Deloitte describes as "untapped" and as large as $4.5 trillion. Business buyers use the service, called Fundbox Pay, to make purchases. The supplier gets paid right away minus a processing fee. The buyer then has 60 days to pay Fundbox with no interest, or can extend their terms for a fee.

Fundbox is part of a growing market of payment companies that are using their own track record with corporate clients in vetting credit risk to find opportunities that more traditional lenders such as banks may overlook.

Square and Intuit use alternative merchant data for underwriting in their separate lending programs; and PayPal also uses payment data from its merchant clients.

The idea is this data provides a picture of a business's cash flow that's more predictive of that client's ability to pay the loan.

Fundbox uses its own underwriting, built over five years of artificial intelligence investments, to gauge the creditworthiness of business buyers. Fuloria contends this analysis moves beyond traditional credit risk tools such as FICO scores for smaller businesses.

"AI is able to assess the health of a business without using FICO as a data source," Fuloria said. "We're not reliant on one particular score or source of data to underwrite these businesses."

Fundbox is also coming at the problem with plenty of its own data. The company recently finished research on unpaid invoices that found the average small business has $84,000 in unpaid invoices at any given time. For the U.S. that amounts to $825 billion per year.

This contributes to a slowdown in the movement of money in small businesses. Harvard University researchers estimate sellers are carrying an average of three times their annual income in accounts receivable to cover their customer's credit, which still operates on a bar-style "tab" in many cases. U.S. small businesses hold about $1.2 trillion in debt total as a result.

And small-business credit cards are not as widely used as consumer credit cards or large corporate cards, and actually declined in use after the 2008 financial crisis.

"Small businesses are really underserved in the credit area," said Laurie McCabe, co-founder and partner at SMB Group. "It's not always easy for a business to gets funds when they need it."

One of the main gaps a company like Fundbox can fill is to move funds faster by assessing the risk that causes some of the funding problems. "They are doing the legwork to make sure if one business extends credit to another that it will get paid back," McCabe said.