P2Binvestor (“P2Bi”) is an online marketplace lender that provides asset-based lines of credit of $1 million or more. Typically, its borrowers are rapidly growing consumer products and professional services companies that can’t yet access bank credit. Through the application of technology, P2Bi has democratized access to this kind of debt financing by making it available to companies having annual revenues as low as $1 million. I spoke with Krista Morgan, co-founder and CEO, about what makes P2Bi different.
Growth Capital for Not-yet Bankable Companies
Initially, Krista thought P2Bi would be providing $50,000 to $100,000 loans to small businesses. However, she and her colleagues discovered a better fit with companies in the $1 million to $10 million revenue range.
A classic case is a small, growing, but as yet unprofitable, specialty food company. It might be completing a successful, regional trial with a national retail customer such as Whole Foods. A successful trial can often lead to a national roll-out. However, to fulfill the inventory requirements of a national program requires financing. Bank debt is not in the cards for an unprofitable business. Even if an SBA-backed loan is feasible, it usually takes months to put into place.
That’s where P2Binvestor fits in. They can underwrite a revolving line of $1 million or more backed by the receivables from creditworthy customers like Whole Foods. Underwriting is a matter of a few days or weeks, depending on the borrower’s preparedness.
As the borrower grows and becomes profitable, it will transition to lower-cost bank financing. Krista says that a typical borrower is with P2Bi for up to three years, during which time its line of credit might grow tenfold.
Asset-based Lenders View the World Differently
Most lenders look to the free cash flow generated by the borrower in the normal course of business to service debt. Such “cash flow lenders” view collateral as a secondary source of repayment. Consequently, cash flow lenders are keenly interested in the debt capacity and character of the borrower.
Asset-based lenders view the world a little differently. Sure, the creditworthiness of the borrower matters. However, true asset-based lenders are at least as sensitive to the collectibility of the borrower’s accounts receivable. To the extent the borrower sells to large, creditworthy customers such as national retail chains, an asset-based lender might be willing to overlook some uncertainty about the borrower’s future cash flow. In other words, collectible receivables and readily liquidated inventory can overcome uncertainties regarding a borrower’s free cash flow in the eyes of an asset-based lender.
Asset-based Loans Are Not New
Asset-based loans have been around a long time. Early in my career, I worked in the “leveraged capital” group of a very large, global bank. We made competitively priced loans of $50 million or more to established companies having revenues of at least $100 million.
In many cases, my bank would lead a “syndicate.” That is, my employer would originate, negotiate, and manage the credit. Other banks would “buy” pieces of the loan. Syndication is a way to manage loan portfolio diversification, boost profits, and develop differentiating expertise through the origination of more loans than would otherwise be possible.
Quite frequently, our group would make asset-based loans that couldn’t be underwritten per the standards of the “normal” bank. Usually, this was due to the leverage of the borrower. Oftentimes, the borrower’s high debt level was the result of a leveraged acquisition or buyout (“LBO”).
Such asset-based loans required the services of an entire floor of receivables and inventory specialists as well as a dedicated team of auditors. That kind of loan overhead wasn’t cheap. Because we charged competitive rates of interest, we had to make big loans to fairly large borrowers in order to make a profit.
Of course, asset-based loans were, and are, available in smaller amounts to smaller borrowers. Historically, though, availability of such loans came at a steep price.
Technology Changes the Asset-based Lending Game
What’s new is P2Bi’s ability to leverage internet technologies to reduce the historically high cost of administering asset-based loans.
The fact that P2Binvestor offers asset-based loans to companies as small as $1 million is unusual but unremarkable. What’s new is P2Bi’s ability to leverage internet technologies to reduce the historically high cost of administering asset-based loans. That enables P2Binvestor to offer small-ish asset-based loans at reasonable interest rates.
Furthermore, internet technologies allow P2Binvestor to syndicate loans in the form of crowdfunding to individual (accredited) investors. Syndication (presumably) boosts P2Bi’s profit, increases its loan origination capacity, and accelerates the accumulation of underwriting expertise at the small end of the credit market.
Large companies have always had access to the tools of corporate finance. New technologies in the hands of lenders such as P2Binvestor have made such tools accessible to small businesses.
Entrepreneur as Lender
Krista isn’t a banker or any kind of typical finance-type (although she does have a degree in economics). Rather, she’s an entrepreneur. As entrepreneurs are wont to do, she co-founded P2Bi because she perceived a need and saw a way to bring a new perspective to an old market.
As an entrepreneur, Krista finds joy in helping other entrepreneurs. Most of P2Bi’s borrowers refinance with bank debt within three years, Krista celebrates that transition as a victory.
Her enthusiasm for supporting other entrepreneurs doesn’t end with P2Bi. She’s also the co-host of Women Who Startup Radio, a “community to celebrate, connect and empower Women Who Startup, Women Founders, Women Who Code, Women Who Tech, and Women Entrepreneurs in Denver and beyond.”
Who do you want as your lender?