Using Credit To Close The SMB ‘Funding Gap’

FinTech Fundbox said on Thursday (March 28) that it is expanding its partnership with Synchrony, the consumer financial services company, to make B2B credit available to the latter’s merchant client base. Synchrony already offers consumer financing to those merchants across verticals such as retail, auto and health.

The companies said in their announcement that the strategic partnership will allow for the integration of B2B credit within the existing Synchrony workflow. In terms of process, the Synchrony merchants seeking a line of business credit can apply through Synchrony’s online Business Center.

In an interview with PYMNTS, Sebastian Rymarz, CBO at Fundbox, said credit decisions can be rendered in minutes, with revolving lines of business credit accessible for up to $100,000. In addition, funding can be available as soon as the next business day.

The announcement comes as there is a “funding gap” that stymies small business (SMB) growth prospects, and sometimes their survival, Rymarz told PYMNTS. The gap is part of business life for firms large and small, and reflects the fact that there is often a timing mismatch between revenues, expenses and capital expenses. Consider the funding gap that exists when a retailer needs to both procure and make payments on inventory — before the goods ever hit the market and are sold.

Hiccups — And The SMB Financing Need

“There are other hiccups, because life doesn’t work the way everyone expects it to,” said Rymarz, who noted that seizing new opportunities may also lead to a funding gap for business operators. “Leaning into growth means that you are spending more in order to earn more,” he added.

Drilling down to the SMB level, there is a significant lack of capital supply, said the executive. Larger firms have the ability to tap into commercial paper or long-term debt markets — avenues less readily on offer for SMBs.

The market opportunity for those who would serve the B2B commerce market is huge — in Rymarz’ words, “it’s larger than life.”

Depending on where one looks or what figures one uses, the various estimations of B2B commerce run to trillions of dollars. B2B commerce, overall, is worth as much as $24 trillion, according to some estimates. The SMB slice of that can be worth as much as $5 trillion to $10 trillion, cited by Deloitte projections. Rymarz noted that the “market’s unmet need” can be as much as $2 trillion to $3 trillion.

Waiting for cash to arrive solely from operations can be a slog, as it takes 21 days on average to get paid. Per Fundbox, the value of unpaid small business invoices stands at $825 billion. That’s equivalent to several percentage points of U.S. gross domestic product.

The SMB financing need is unmet, one might surmise, because the current ways of extending credit to SMBs are anything but efficient. Rymarz said SMB growth prospects are constrained (as their access to credit is limited) because the “the traditional way of underwriting small businesses,” he said, “is to basically underwrite them as consumers.”

The lenders (think of banks and other traditional conduits) or would-be lenders look at the SMB owners’ FICO scores, “and maybe you look at some business data,” Rymarz pointed out, such as tax returns or bank statements. The average operational cost for a bank to originate an SMB loan can be $3,500, meaning the loan may be less than economically desirous to the bank. The average APR on merchant cash advances can be 150 percent, which can be prohibitively expensive for the borrower.

Bringing Data Into The Equation

With the aid of AI and machine learning, said Rymarz, thousands of other data points can illuminate the fact that “it is surprising how much color you can get on a business, and its actual financial profile and credit worthiness.”

He recounted that Fundbox is able to plug into data sources as far-flung as bank accounts, invoice platforms, ERP data and a significant amount of unstructured information. As a result, the view is a holistic one, with a sense of the SMB/borrower’s vendor concentration, cash flow volatility and leverage ratios.

The credit-decisioning is based on a more accurate risk profile. Rymarz noted that the credit extended is risk-adjusted, often on better terms than might be seen through other, more traditional credit options.

“SMBs deserve more credit,” he told PYMNTS. “And with more credit, these firms can thrive.”