Danai Pathomvanich
May 19, 2015
As mobile and internet financial services become ubiquitous in the region, more and more online lenders will become small and medium size business (SMEs) lifelines.
At the same time, new entrepreneurs relying on internally-developed algorithms and lending models will operate profitably in markets that have traditionally been deemed too high-cost and risky.
Fundbox – a US example
A recent New York Times article “Online lenders offer a faster lifeline for small businesses” shows how the US market has adapted online and mobile lending to help SMEs.
It shows how Fundbox provides small businesses quick and easy short-term loans against their outstanding invoices.
Within an hour of signing up on Fundbox’s website and allowing access to his company’s bank account and accounting software, QuickBooks Online, a New York City web-site developer was able to access a $2,500 credit line.
It took the owner only a few mouse clicks to select an unpaid invoice in QuickBooks and have Fundbox rapidly deposit the cash into his bank account.
Small short term loans
Fundbox specializes in loans that are normally too small for most banks.
Credit lines of between $US1,000 (Bt32,000 to $US25,000 (Bt800,000) are provided to clients ranging from sole practitioners like freelance programmers and designers to companies with dozens of employees, like small manufacturing firms.
“Customers can borrow in increments of as little as $100 (Bt3200),”
Fundbox is competing with an expanding crop of online lending rivals.
“The field includes Blue Vine, another firm that advances funds against invoices; small-term lenders like Kabbage and OnDeck: peer-to-peer lenders like Funding Circle, Lending Club and Prosper; and payment processors like PayPal and Square offer loans to some of their merchants.
Each of these companies has a different business model, but they’re all eyeing a similar market: loans of four to six figures to companies too new or too risky to interest banks and traditional lenders.
Badly underserved market
In the US as well as in Thailand, the small and medium loan business market has been underserved because financial institutions’ underwriting costs for $US20,000 (Bt640,000) and $US2 million (Bt64,000,000) loans are about the same.
The financial institutions don’t want to bother with smaller loans.
Credit cards are often offered as an option, but cash advances are normally very expensive.
At the same time, SMEs are in dire need of these short term loan services.
“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,” said a Fundbox Board member.
How they operate
Fundbox normally advances cash for 12 weeks, and collects its repayment in weekly installments automatically debited from the borrower’s bank account.
“Its fees vary based on the riskiness of the loan, but the typical fee for an advance on a $5,000 invoice would be in the $243 to $343 range, broken up over the life of the loan. (If a loan is paid back early, before the 12 weeks are up, the remaining fees are waived.)”
This type of loan, the article said translates into 38 to 54 per cent annual percentage rate (APR).
Metrics like annual rates, Fundbox said are the wrong way to look at the company’s service. “We don’t want to be a loan. That’s not the right financial discipline for business owners.”
Smooth lumpy cash flows
New online lenders, Fundbox said offer SMEs quick and easy solutions for lumpy cash flows.
Upon funding, Funbox’s advance is clearly displayed.
“.... click on an invoice you’re considering borrowing against, and a pop-up window displays the exact amount of Fundbox’s fee and each weekly repayment installment.”
Market growing fast
According to New York Times, the new lenders still represent a sliver of the overall business credit market, but they are growing fast.
Silicon Valley investors have also been excited about Fundbox with a $US40 million recent funding round.
