P2Binvestor is an online lender that specializes in making asset-based loans to growing business-to-business (“B2B”) sellers who can’t access bank credit. I first spoke with Krista Morgan, P2Bi’s co-founder and CEO, in May. Since then, Krista and her colleagues have launched a new partnership with community banks that may point to a new era of choice for human scale businesses.
New Opportunities and Challenges for B2B e-Commerce Sellers
Wholesale distribution—done right—can be highly complementary to direct-to-consumer e-commerce. The wholesale channel can help accelerate brand awareness and get you to break even cash flow faster. Up until recently, though, selling to a substantial network of specialty retailers could be a hassle and expensive. However, established players such as Shopify and Lokad and newcomers such as Convictional are building tools that make one-to-many wholesale distribution more efficient and profitable for small e-commerce sellers. That’s creating new opportunities for growth.
However, unless you have market power, you’ll probably be compelled to offer your largest wholesale customers payment terms. That means an additional delay between the time you purchase your product and the time you get paid for it. Furthermore, you may find that you need to carry more inventory relative to your sales in order to provide a cushion against spikes in demand caused by big orders. That’s likely to exacerbate your need for financing—particularly if your business is growing rapidly.Understanding the Cash Cycle
Community Banks Would Like to Lend to You But…
Local knowledge and relationships are the principal sources of differentiation between community banks and their larger regional and national competition. In the current environment, many small banks would like to diversify their loan portfolios away from real estate. Consequently, community banks are very interested in developing relationships with up-and-coming businesses.
From the borrower’s perspective, community banks can be very attractive sources of loan financing. Their rates are among the lowest to be found. But those low-cost loans also mean that community banks can’t afford to take risk. Opportunity is exciting for an entrepreneur but means uncertainty and risk to a lender. Those differing perspectives can sometimes be difficult to bridge.How Lenders Evaluate Credit Risk
The value of accounts receivable and inventory represents potential collateral to mitigate a lender’s risk. Community banks will take such collateral value into account when considering a loan. That said, most community banks don’t have the administrative infrastructure in place to engage in true asset-based lending (“ABL”). That means that even when a community bank is willing to extend credit, the loan amount it can offer compared to the value of the collateral (the “advance rate”) may be less than optimal. Consequently, there is often a painful gap between your financing needs and a community bank’s lending appetite.
Bridging the Financing Gap
The problem isn’t new but it may be getting more pronounced. Historically, nonprofit lenders such as Montana & Idaho CDC (“MCDC”) have stepped in to fill the void.
“Stretch” lenders like MCDC will team up with banks in an arrangement in which the bank provides a portion (a “tranche”) of the total financing at a relatively low rate of interest in exchange for a “senior secured” position relative to the borrower’s collateral. MCDC will take a “subordinated” or “second position” on the collateral and may not receive principal repayments until after the bank’s tranche is repaid. Because the subordinated tranche is riskier, it carries a higher interest rate. Taken together, this kind of collaborative lending allows for the extension of credit at a reasonable cost to not-quite-bankable borrowers.
There are a couple of limitations to the historical model, though. There just aren’t that many lenders like MCDC, and their geographic and industry scope is limited. If you happen to be located in the wrong part of the country, you may be out of luck. In addition, the application process can be slow and is quite often complicated by the bank’s desire for a partial loan guarantee from the Small Business Administration.
Loan Syndication in a New, but Familiar, Way
P2Bi recently launched its Bank Partnership Program. In essence, P2Bi is emulating the role played by MCDC and others. What’s new is P2Bi’s technology-facilitated asset-based loan (ABS) application and administration. Furthermore, P2Bi’s marketplace crowdfunding model allows it to scale its loan capacity relatively quickly.
Like MCDC, P2Bi gives community banks the opportunity to engage in lending relationships with emerging businesses earlier than would otherwise be possible. Unlike MCDC, P2Bi also allows community bankers to benefit from P2Bi’s existing ABL platform. For its part, P2Bi gets to leverage its investment in its technology platform, which should improve its profitability over time.
The borrower, of course, benefits too. Krista says early experience shows a reduction in the blended interest rate from 15% to the range of 8% to 12%. Because a banking relationship is in place from the start, the move to a fully banked loan with even lower rates is fairly seamless when the borrower’s creditworthiness warrants.
Who It Fits
Candidates for P2Bi’s new program are companies with revenues north of $1 million and at or near break-even profitability (or have substantial equity) that have substantial accounts receivable and inventory. Ideally, the credit requirement should be at least $750,000. The borrower’s accounts receivable shouldn’t have big customer concentrations or delinquencies.
How It Works
Start by making an online application at P2Bi. P2Bi will then work with an appropriate community bank partner to assess your application based on their joint credit criteria.Together, they will make a single loan proposal with a single, blended rate. P2Bi and its bank partner will work out their risk and interest-sharing arrangement between themselves. The loan is serviced via P2Bi’s online platform, but you’ll have a direct relationship with P2Bi and the bank.
P2Bi recently announced its first bank collaboration with New Resource Bank, which focuses on mission-driven borrowers. Over the course of 2018, Krista anticipates that P2Bi will add 10 or more new community bank relationships to its co-lending network. As the network grows, the capacity and flexibility of the program will grow. In the meantime, it’s somewhat limited.
Technology Continues to Reshape the Financial Landscape
Early in my career, I worked at a couple of big banks. Originating “syndicated” loans was our stock in trade. However, we could rarely consider a deal of less than $50 million. In effect, that limited us to funding leveraged buyouts and acquisitions of fairly large businesses. Technology is changing the rules of the game.
Nonprofits have been able to engage in syndicated loans of an order of magnitude smaller. Such lending was, to a degree, enabled by foundation and government subsidies designed to stimulate small business. P2Bi is a for-profit business. It can enter this end of the market because its technology platform automates what historically was a very labor-intensive process. What used to be the domain of corporate finance is becoming available to all but the very smallest businesses. (We even see rough analogs for very small borrowers in the form of loans from the likes of American Express based on analyses of credit card receivables.)
Anticipating Your Needs
If your strategy calls for accelerating growth by building your wholesale channel, it’s likely that you’ll need more financing sooner. Even in the best of circumstances, it can take a while to cultivate the trusted relationships that underpin the most attractive and affordable financing that will support your long-term profitability. Anticipating your needs and educating yourself about options will expand your domain of choice when the time comes. P2Bi’s new program might be another option to add to your list of possible sources.The Right Financing for Your Business