Yaniv Liron has pulled cash and credit from every available source to keep his 11-year-old web design and development business, Lumina, running smoothly — a situation familiar to many small-business owners.
Even though his company is established and profitable, obtaining a bank loan or credit line has always been painful. The paperwork takes days to prepare, approval decisions can drag on for weeks or months and the process, he said, “involves selling your soul and begging on your knees.”
Four months ago, he found a simpler source of working capital: Fundbox, a company that gives business owners cash advances 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, Mr. Liron had a $2,500 credit line. It takes just a few mouse clicks for Mr. Liron to select an unpaid invoice in QuickBooks and have Fundbox rapidly deposit the cash into his bank account.
“It’s a handy tool,” he said. “I can’t go to my employees and say, ‘A client isn’t paying me, so I can’t pay you.’ This helps even things out. I’ve tried all kinds of different methods of financing, and this was definitely the easiest.”
Investors in Silicon Valley are also excited about Fundbox, which closed a $40 million funding round last month. The company specializes in loans too tiny for most banks to bother with, offering credit lines of $1,000 to $25,000 to clients that range 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.
Fundbox’s ambitions are much larger than its loans. “We believe we can create the next Visa,” said Eyal Shinar, the chief executive and a co-founder of the company, which is based in San Francisco.
To win new customers, Fundbox is competing with an expanding crop of online lending rivals. The field includes BlueVine, 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, which offer loans to some of their merchants.
Each 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.
That market has been a badly underserved one, according to Karen G. Mills, a senior fellow at Harvard Business School and former administrator of the United States Small Business Administration. Because the underwriting costs for banks to scrutinize a potential borrower’s financial records and business plan are about the same for a $2 million loan or a $20,000 one, it’s often not worth the banks’ time to bother with the smaller sums. Credit cards are an option, but business cards can be hard to qualify for, and the cost of cash advances from them can be dauntingly high.
The online lenders have two advantages over banks: internally developed algorithms and lending models that they say allow them to operate profitably in a market traditionally viewed as fairly risky, and fewer regulatory constraints. Because these firms largely work outside the banking system, the new online marketplace currently “falls between the cracks” for federal regulators, Ms. Mills said. (She says that may eventually change if the market grows big enough to attract closer attention from lawmakers.)
That means the companies can get away with sometimes charging rates far steeper than those of traditional lenders.
Fundbox, for example, 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.) That translates to an annual A.P.R. of 21 to 30 percent.
Mr. Shinar, Fundbox’s founder, thinks metrics like annual rates are the wrong way to look at his company’s service. “We don’t want to be a loan,” he said. “That’s not the right financial discipline for business owners.”
He views Fundbox’s advances as a short-term way to smooth out the often lumpy cash flows of small companies, which sometimes need capital right away for projects they will be paid for later. Because the cost of the advance is clearly displayed at the outset — 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 — he considers the company’s pricing more transparent than that of other lending options, like credit cards, that may offer lower rates.
Some customers also see it that way. “I’m not too concerned about the rates,” said Ross R. Mason, the founder of Motion Media Solutions, a video production company in Addison, Tex. “The costs are very clear, and the cash flow is perfect. I can’t imagine how it could be done better.”
For him, the biggest advantage of Fundbox is its direct integration with his online QuickBooks account. “Everything is automatic and immediate, so we don’t have to spend time on extra entries and accounting,” he said. “We know the money is coming in soon from our clients, so we’re not going to get overextended, and we pay attention to the balances every week.”
Even tiny loans can make a significant difference for some entrepreneurs. Moira Richardson began selling paintings, crafts and art supplies on Etsy in 2007 and turned her online shops into her full-time job two years ago. Soon after, she applied online for a Kabbage account. Although the amount of personal information the application required — including access to her bank account and the eBay account she sometimes sells through — gave her pause, she decided to “take the plunge” and try it, she said.
Within minutes, she had access to a $700 credit line. Her first loan from it let her buy inventory for her supplies shop. She has used the Kabbage line nine times since then, usually paying the loans off early to save on fees and factoring her borrowing costs into the product prices she sets in her store. Most recently, she used a loan to stock up on several newly released printing plate sizes from Gelli Arts — items she knew would be in heavy demand by her customers.
“I ordered a few cases right away, and then Gelli Arts quickly sold out of the first batch,” she said. “The loan gave me a chance to have the hot inventory in my shop before anybody else did.”
The new lenders still represent a sliver of the overall market for business credit, but they’re growing fast. Fundbox expects its loan volume to be at least $200 million this year, and Kabbage says it’s now funding $3 million a day in loans, up from under $1 million a year ago.
Ms. Mills thinks those numbers will keep snowballing.
“These new entrants have done a couple of really innovative things that bankers haven’t done,” especially around customer service, loan approval speed and fee transparency, she said. “In many ways, I’m delighted with how this has developed. Entrepreneurs are the market, and they’re also the ones solving the problem. They’re seeing the gap and stepping in.”
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