The landscape in SMB lending is almost totally unrecognizable from what it was even a short five years ago, BlueVine Founder and CEO, Eyal Lifshitz, told Karen Webster shortly after his firm’s latest $60 million funding round was announced.
Though today most businesses are both comfortable and familiar with borrowing from an online lender, that would have been the territory of early adopters just five years ago. Most business still looked to banks, despite the fact that in the wake of the financial crisis and subsequent credit crunch, lending from banks more or less ground to a halt where SMBs were concerned.
But as SMBs nationwide continued to need access to credit, a half-decade ago was a great time to start a small business lending firm.
“We’ve really seen the industry mature,” Lifshitz observed. “A few years ago, we saw a lot of small firms experimenting in this space, and there was a ton of money poured into the segment.”
However, as everyone got down to work – and those ladlefuls of VC dollars stopped dropping dollars into the segment with great frequency – the markets began to thin out. And for a very good reason: SMB lending is a tough business to be in, Lifshitz told Webster. It’s not enough to be very good at one element of the business – firms have to be good at operational functions, risk management, capital management, compliance and product to keep from being dragged down by bad loan performance. Giving out money is the easy part – getting a business, particularly a small business, to pay it back is where execution on all of those strategic pillars is key, and non-negotiable.
“The problem is that everything is important, and not only does a firm need to be able to do it all, they need it all to progress in lockstep,” Lifshitz said.
It’s also important, he noted, to steer away from being all things to all people. One of the things that becomes clear very early on is to be disciplined about the segments of the big umbrella of SMBs that BlueVine wanted to target, so that their products, credit underwriting and technology can support the delivery of loans that fit the needs of those segments.
Who They Serve
“Small business” as phrases go is pretty vague, Lifshitz told Webster. The vast majority of small businesses are very, very small. That was the market segment that BlueVine intended to serve, setting their minimum qualifying annual revenue at $50,000.
It became apparent very quickly, Lifshitz noted wryly, that it wasn’t a market segment they could address in either a scalable or profitable manner, given the diversity of those micro, zero-employee businesses and the credit risk associated with them.
Instead, particularly for BlueVine’s line of credit product, they focused on employer-based small businesses with median annual revenues between $700,000 and $1 million per year, which are generally LLCs or corporations.
BlueVine’s only other product, invoice factoring, targets much larger businesses.
Within those segments, BlueVine is focused on the near prime, prime and super prime businesses. Over time, Lifshitz said, their credit profile has veered more toward prime.
“The product we offer is somewhat different than the cash advances that we are often compared to,” Lifshitz told Webster, “and one where the risks run high. We are offering a revolving credit – and that is riskier on the credit ledger, which means we want to make sure businesses are stable enough to handle it.”
The Line of Credit
Lifshitz says BlueVine’s line of credit product is very different from merchant cash advance products offered by a variety of players, including Amazon, PayPal and Square.
“[Merchant cash advances] from the larger players typically target the smaller end of the spectrum; the average merchant cash advance at Square is about $7,000, as opposed to the average BlueVine credit line, which is around $40,000,” Lifshitz explained.
He also offered that lines of credit are scarce on the supply side for SMBs, since they are more complicated for a lender to manage. The risk for the lender isn’t when the money is first given to the SMB, when there is a fresh underwriting, but six months or a year down the line, when something unexpected happens that can endanger the merchant's financial position.
BlueVine’s tech was built to continuously underwrite the line of credit it offers to SMBs, said Lifshitz. Using an internal data analysis tool, BlueVine creates a “BlueVine Score” that is the algorithmic equivalent of asking a series of questions about the creditworthiness of the borrower every day.
That score then tells them how to treat that credit line, whether it needs to be adjusted down or even suspended.
Fun with Factoring and the Future
BlueVine also offers online invoice factoring, which was very much a greenfield when Lifshitz founded the company five years ago. He said the space hasn’t become crowded since.
“Factoring is a tough product and hard to manage entirely online,” he noted.
It is also, he noted, a badly misunderstood product. When most talk about invoice factoring as a financing tool, the reflexive definition of its worth is a way by which suppliers can get paid faster by taking a loan in the value of their invoices.
Although technically true, it’s usually the reason that suppliers are interested. If the only concern was getting paid faster, a good business with a large number of outstanding receivables from high-value buyers probably won’t have much of a problem getting a loan.
Factoring, Lifshitz said, allows the supplier to take out a much larger loan, because they are essentially substituting their buyer’s credit for their own and, in many cases, getting more favorable terms. For that reason, he said BlueVine is comfortable lending up to a $5 million cap, which could easily increase.
“You might be a small business, but the question isn’t about you when it comes to factoring – we are reviewing whether a big Fortune 100 company is good for the $1, $2 or $5 million they want to borrow."
That said, invoice factoring is still a tricky business, but one that is highly scalable. Lifshitz said that in their first four years of originating loans for SMBs, BlueVine just this week crossed the $1 billion mark, and will lend $1 billion for the full year.
“We are nowhere near our potential – we are just scratching the surface. There is still a lot of room to scale,” he remarked.
The $60 million they’ve just secured in investment funding – and the $200 million credit facility they’ve also recently announced with Credit Suisse – will also be key to that effort.
Credit in the segment is improving, and there is no less interest in SMB lending today than there was when BlueVine entered the space. Quite the contrary, Lifshitz noted, the interest is growing.
But amateur hour is over: The digital lenders serving the segments are either ready to grow up or step aside.