For SMB service providers like PayPal, Square and Intuit, a clear vision into your partner’s cash flow comes part and parcel with the job. And, as all three firms have shown in recent months, that data comes preloaded with the potential for building out additional capacity as a platform by entering the lending landscape.
Square and PayPal have both been at this for the bulk of a year; Intuit is the new kid on the alt-lending block. The maker of Turbo Tax will announce later today (Sept. 17) that it is pairing up with OnDeck Capital to create a $100 million fund that will finance loans for users of the QuickBooks accounting software suite.
“The bottom line is that small businesses need financing,” said Intuit Executive Vice President Dan Wernikoff. “They are not getting it at the same levels that large businesses are.”
Small businesses have struggled to find financing since the Great Recession and the resulting credit crunch. And while all segments of lending were hit, consumer lending and loans to large enterprises have recovered — SMB lending, not so much. Banks held $599 billion in small loans to businesses at the end of Q2, according to the FDIC. That is a drop of 16 percent from a peak of $711 billion in 2008.
Intuit’s attempt to fill that gap is becoming something of a common play for a FinTech firm. PayPal and Square are also using their transaction data to provide financing to their small business customers, while UPS and Kabbage have teamed up on SMB finance.
There are, of course, associated challenges. Default rates among small businesses are higher — which is why banks don’t like lending to them — and have been on the rise lately. However, firms like Intuit, who see a good deal of a partner’s transactional data, think they can curb that problem with smarter underwriting.
“We are seeing sales patterns week by week, month by month, year by year,” said Darrell Esch, general manager of small business lending at PayPal. A PayPal spokesman says delinquency rates are “in the low single digits and falling.” Loan payments are deducted on a daily basis, further reducing risk, the spokesman added.
Intuit’s first step into lending was in 2013, and over the last two years, QuickBookers have borrowed about $200 million across about 5,000 loans. Intuit played more matchmaker in those loans than lender and was paid referral or origination fees for its trouble.
But volume has been low, likely owing to an interest rate that clocks in around 30 percent, when a bank-backed alternative (if available) would go for closer to 5 percent. Wernikoff said Intuit’s new program offers cheaper financing to the company’s strongest customers, with rates now averaging between 8 percent and 19.9 percent for lines of credit with terms of up to one year and payments deducted on a weekly basis.
Intuit’s new service will take data from QuickBooks, like average cash balances, to identify borrowers who represent a low risk of default and a high likelihood of needing financing in the next three to six months. OnDeck originates the loan and services it. It is unknown how much capital each company is contributing to the venture or how profits will be split.