Technology keeps making it easier to separate you from your money. PayPal enabled you to easily send money via the internet. Square allowed businesses to use a smartphone to accept your credit card. Apple Pay and Android Pay flipped this idea on its head and let you pay with your phone instead of a card.
Despite this innovation in how consumers can pay businesses, the way businesses pay each other hasn't changed much. San Francisco startup Fundbox wants to give businesses another option.
The company already offers loans to small businesses, tapping into the businesses’ bank and accounting software to decide whether to lend. Its new service, Fundbox Pay, is essentially a combination of a credit card and a payment system like PayPal for small businesses.
The idea is simple, but it takes some explaining. Many small companies extend credit to other businesses. A wholesaler, for example, might ship flour to a bakery with the expectation of getting paid 30 or 60 days later. The wholesaler, likewise, buys from its own suppliers on credit. But what happens if a bill from a supplier comes due while the wholesaler is still waiting on payments from bakeries?
That’s not uncommon. The typical small business only has enough cash to pay 27 days of its usual bills, according to a study by JP Morgan Chase. As a result, many take out loans to cover these payments.
Fundbox is trying to solve this problem by playing the role of a typical credit-card provider. In our hypothetical example, the flour wholesaler would offer Fundbox Pay as a payment option. The baker would apply for credit from Fundbox. If it’s accepted, Fundbox would pay the wholesaler, minus a 2.9 percent fee. The wholesaler gets paid more quickly, and collecting from the baker becomes Fundbox's problem.
Fundbox estimates that small and medium businesses-to-business payments are a $5 to $10 trillion market in the US.
Of course, small businesses can already take out loans and credit cards from banks from to pay suppliers---if they can get credit. There's more demand than supply for small business credit right now, says Karen Mills, a senior fellow at Harvard Business School and former administrator of the US Small Business Administration, especially since the financial crisis of 2008. "During the great recession, a lot of banks pulled their lines of credit for small businesses as they tried reduce their exposure to risks" she says.
Alenka Grealish, an analyst at Celent, says banks are reluctant to lend amounts smaller than $100,000 because of the costs associated with underwriting loans. "The traditional system is human and paper based," she says. "Businesses provide business plans and financial statements in PDF or on paper, and it all has to be entered into a system." It ends up costing a bank hundreds of dollars just to decide whether or not to lend a business money, regardless of the size of the loan. So it makes sense for banks to focus on larger dollar amounts that generate more profit when they're paid off.
Fundbox and other startups like Kabbage, on the other hand, simplify the process by extracting data directly from a business's bank and accounting software and using machine learning algorithms to predict whether a business will pay up. Fundbox head of communications Tim Donovan says the company has a less than 1 percent loss rate on its existing loan products.
Fundbox COO Prashant Fuloria believes that Fundbox Pay could help its algorithms become more accurate, as the company is able to gain more insight into the relationships between different companies, creating a "small business graph" not unlike Facebook's social graph.
- Fundbox was among several online lenders that debuted earlier in this decade.
- Electronic-payments company Square supports merchants selling online as well as offline.
- Affirm aims to bring more transparency to business lending.
