After a strong showing with investors in the winter and early spring - it looks as though alternative financial services is poised to continue capturing investor interest going into the (we hope at least here in the Northeast) dog days of 2015’s summer.
The latest beneficiary of venture capital's emergent love affair with “Alt Fin Serv” is eProdigy - a FinTech holding company serving the alternative lending industry. The firm is behind a variety of FinTech products and services as well as a lending platform through its associated companies – Capital Stack, ACH Capital, eProdigyACH DBA ACHBanking, eProdigy Loans, 1Workforce, and DailyFunder.
The firm announced last week that it had struck an agreement with a private equity firm to provide $100 million to eProdigy as a loan, with a convertible feature and participation rights.
“Effectively this transaction was a term loan toppled with participation rights for a private equity firm and a convertible feature,” eProdigy founder and CEO David Rubin told PYMNTS in an interview. “That convertible feature allows them to take $20 million of the term loan piece and convert that into equity.”
eProdigy first launched operations in the merchant cash advance field - though soon developed outward with ACH processing for their merchant partners, and a white label service that builds in their proprietary credit ranking algorithm - all with an overall goal of developing an innovative platform to host lenders and finance originators.
“When we first started out in the MCA (merchant cash advance business), that was a function of the type of capital that we had, the high costs, and being a new company in the marketplace. This means for our playbook originally we had to set our risk parameters around targeting higher risk business and working with industries that were on everyone's restricted list. We also worked with developing micro-products for even small businesses that are really looking to get started.”
And Rubin notes - this is an important function for alternative lending to serve - and to serve with a wide spectrum of available products.
“What [alternative financial services] is really seeing is developing into new types of products. At a far end is the merchant cash advance business,” Rubin noted. “If all the moons and stars are aligned, you can qualify for an SBA loan or a bank loan. If there is one out there. That is probably the first stop and the other end of the spectrum.”
But - there is that underserved middle and a dearth of products out there to serve them. This new funding, Rubin noted, allows eProdigy though its network of services to tap into more of that spectrum.
“With our new financing and our lower cost of capital and a different capital structure, we are able to start really developing our loan program that is catered to a high quality merchant in that they have been in business for several years versus several months,” Rubin told PYMNTS. “This new structure allows us to focus on a new merchant class that we can customize programs to and market to.”
Because, as Rubin sees it, investors are taking interest in the alt lending space precisely because they fill a need that is going grossly underserved. The reality, he noted, is that banks aren’t interested in underwriting small business loans - and most business don’t need $25 million, five-year loans.
And this is a market the Rubin says eProdigy, and other alternative financial services players, can most effectively reach.
“There are industries banks don’t want to lend to and never have historically, even in the best of times. There are loans that don’t need to be done in long term amounts because the short term actually reflects the flux of business better, [and] there are different forms of data we can now use to rank profitability like UPS deliveries or backed up information from Quickbooks.”
And, most importantly, he says, they can offer speed.
“The stuff that I’ve seen out there in terms of surveys - people in general, merchants in general, when they are asked about seeking capital there are so many merchants whose mindset at this point is they are looking for capital but they just won't go to a bank,” Rubin noted. “They know they won’t get approved, they know they will get put through the ringer. No one wants to go through that - and alternative lenders are offering a better option.”
And, he noted, it is a better option that even banks are getting more and more willing to tap into - and an increasing number of alternative lenders are also making a business out of white labeling their services.
“Who knows - banks are of the mindset where they can offer an instant decision to a customer that is sitting in front of them by utilizing the system as a white label partner - that is something we are hoping to see more of down the line.”
As 2015 reaches its halfway mark, two pieces of consensus are rising. One is that the SMB marketplace is critically underfunded and technology can change that. The second is that banks probably won’t be the locus of the future of that funding - unless regulations and current attitudes about small loan underwriting change drastically.
Innovators and investors seem to have come to this realization rather enthusiastically this year. What remains to be seen is which tech will turn out to have been the right big bet.
PYMNTS Investment Tracker Third Week Of May
The third week of May saw $2.1 billion in activity across a variety of investment types - with 60 out of 71 deals (87 percent) of deals disclosing their amounts. The biggest transaction of the week was NXT Capital CLO Financing Round for $408 M, followed by Affirm Debt and Equity Financing Round for $275 million.
The third week of May also saw 40 percent of all activity focused on the retail payments side, with Affirm’s Debt and Equity funding round for $275 million leading the way, followed by MarkLogic sixth round for $102 million.
On the commercial payments side, the biggest transaction was NXT Capital's $408 million CLO Financing, followed by Ignition Partners Fund IV, which reached an amount of $200 million.
Venture-backed and strategic investments on the retail payments side accounted for $847.1 million in the third week of May, with most investments in retail payments in Payment FinTech and Data analytics related to retail, shopping, commerce.
From a geographic perspective, the U.S. was the most active region, followed by China and the Middle East. The median investment amount was $9 million.