Everyone wants to lend to small businesses, as the fintech boom continues to bring constituent players closer together in feature-terms. Thinking broadly, the rising focus on small-business lending amongst B2B fintech and finservices companies feels directionally similar to the rise of consumer-oriented fintech startups adding banking-like features last year.
This week, several stories underscored the growing appetite for lending to small companies, including news that Goldman Sachs is “close to a deal with Amazon to offer loans to the e-commerce giant’s merchants,” according to CNBC. Amazon has a host of data concerning its merchant-partners and Goldman has a pile of money; by combining their powers, they can probably make some money loaning out capital.
The Goldman news is merely an amuse-bouche, however. What we care about are the startups working to loan out money to other concerns. This week, Divvy announced a neat program that brings it into the space, while Kabbage, a Vision Fund-backed venture, made its small business loans even more flexible.
So many loans
The idea of digital-first startups lending money to small businesses isn’t new. Square Capital has been active since 2014, a year before Square’s IPO.
And more players have piled in since: Stripe, another payments processor, launched Stripe Capital in September 2019. Its offering was simple, as TechCrunch reported last year: “[Stripe Capital is] a service for advancing cash to customers that in turn gets repaid out of their future sales made through Stripe’s payment platform, with loan amounts and repayments based on the customer’s transaction activity on Stripe itself.”
If this market sounds a bit like revenue-based financing, the capital-sourcing method growing in popularity amongst SaaS and e-commerce startups, it should. They are very similar. (Clearbanc is another player in the space, a market we’ve explored extensively.)
But back to the idea of pure small business lending — instead of, say, startup capital advances — let’s peek at the latest.
Divvy
Divvy, a company I’ve covered for years, raised a huge amount of capital last year. The Utah-based business-expense management startup is now adding a new product line to its mix: Divvy Capital. What does that do? In its own words:
Divvy, the leader in spend and expense management, today announced Divvy Capital, a real-time funding solution for businesses in need of fast, flexible capital. Through automatic pre-approval, business leaders can bypass the time-consuming application process and gain instant access to the funds they need to grow their business.
Flexible capital from a company that already has some insight into the finances of the firms it might lend to? Who would have considered such a thing! Well, Kabbage, for one.
Kabbage
Also this morning, Kabbage announced a new tool for users of its “Kabbage Payments” product. Kabbage Payments is a method by which small companies can bill clients and collect payments. So, what is Kabbage adding to its payments service? You guessed it:
Kabbage, Inc., a data and technology company providing small businesses cash flow solutions, launched access to custom loans for Kabbage Payments customers. The new lending product gives U.S. small businesses more control over short-term funding needs. Integrating Kabbage Funding with Kabbage Payments marks the first of many new solutions from Kabbage as it expands to help small businesses efficiently analyze and manage their cash flow.
With custom loans, Kabbage Payments customers choose any term between three and 45 days and either repay in full when the loan reaches maturity or allocate up to 100 percent of Kabbage Payments revenue towards the balance over the selected period.
That should all sound pretty familiar at this point.
So what?
The fintech world is fascinating. And one of its most interesting facets is that differentiated players seem to blend together over time.
Acorns, for example, started off as a way to save and invest small amounts of money. But, it’s becoming more and more of a bank. At the same time, Robinhood, famous for its no-cost stock trades, is also offering banking-like features and even crypto trading. Crypto-trading shop Coinbase also has a debit card — you get the picture.
The move by B2B-focused fintech and finservices players to build out increasingly robust SMB-lending tools is analogous to the consumer banking fintech push. Regardless, “why?” is the question you’re surely asking; why are all these companies building out similar loan services? I have an idea.
Two, actually. The first is that fintech customer acquisition costs (CAC) will continue to rise, which will make it increasingly expensive to land new customers. Over the past week, I’ve chatted on and off the record with a number of investors and operators and there’s a general sentiment that CAC is going up, but not lethally — yet. Still, having more products on hand to monetize landed-customers means a startup can endure higher CAC as the expected value of the customers it acquires goes up.
And, second: Venture-driven growth requirements make lateral revenue development an absolute requirement. One cheap and fast way to grow a startup is to get existing customers to buy more. Kabbage helping SMBs with payments is probably a pretty good business, as is Divvy’s interchange-powered, free business expense service starting to dole out advances. Each wants to go up a rung on the value ladder and drive some high-margin debt revenue.
Especially as they both likely think that they have a unique view into the very folks they will lend to. Why not make more money?
Expect more of this to come.