B2B Payments

Why Banks Withhold Cards From Startups — Even With VC Funding

The world’s startups are having a good year. In the first quarter of this year, KPMG said in a recent report that there were five $1 billion-plus mega-venture capital rounds, and analysts say venture capitalists (VCs) are diversifying their investment targets as emerging focuses, from artificial intelligence (AI) to healthcare, build excitement. The 2018 Q1 saw a combined valuation of VC investments nearing $50 billion — the fourth quarter in a row where VC funding has surpassed $45 million, KPMG noted.

With so much money up for grabs, it may come as a surprise that startups often struggle to get approved for a credit card, even after a lucrative funding round. However, that’s exactly what’s happening, says Henrique Dubugras, co-founder and CEO of Brex — a startup that has designed a commercial card product especially for startups, and one that recently came off its own funding round to the tune of $57 million.

According to Dubugras, this challenge stems from the financial services industry’s tradition of relying on projected profits and personal guarantees to assess whether a business should be approved for a credit card. Though a startup could secure millions in venture capital funding, it could still take years to turn a profit. He noted that, making the issue more complex for banks, startups are not small businesses — that means banks, which are already struggling to address the needs of the SMB community, are often at a loss when it comes to startup clients.

“Traditional financial services are stuck in the past,” said Dubugras in a recent interview with PYMNTS. “They have systems in place that have worked for decades. They’ve typically focused on small businesses or big corporations — many big banks don’t know how to navigate such a small, but fast-growing startup.”

He emphasized that startups and SMBs cannot be lumped in the same category, particularly when it comes to assessing how these companies spend cash.

“Startups typically have more expenses than a small business — and more of these expenses are online and, therefore, require a card,” he explained. “For example, servers, software and ads are all huge areas of spend for startups, and these spending categories are highly likely to be purchased online, almost always with merchants that require credit cards.”

Amazon Web Services, Facebook ads and Google AdWords, which can be instrumental for startup marketing and customer acquisition, are just a few of the vendors Dubugras said are key for startups, yet they require a credit card for online purchases. The natural response to a startup owner in this scenario would be to use their personal credit card to make these purchases. This can be a dangerous habit and threaten the livelihood of the startup, as well as the financial health of the business owner as an individual, he warned.

“The nature of creating a corporation is that it does not have personal liability — otherwise there would be no distinction from people and companies,” explained Dubugras.

When a startup owner mixes personal and business finances, the negative consequences can go in multiple directions.

“Firstly,” he said, “personal credit scores can be affected, which could put the founder’s (or their family’s) credit in jeopardy if the company ever faces financial issues.”

Even if balances are paid in full each month, high utilization of credit lines can put downward pressure on personal credit scores, too. This issue also means that a personal credit card may not even have a high enough credit limit for a startup’s needs.

“Startups are constantly making large payments to get their business off the ground,” said Dubugras. “Software expenses, purchasing hardware, renting an office, etc.”

Relying on personal cards has major pitfalls, but entrepreneurs cannot use this strategy forever.

“Startups are also unique in that, while they start small, they plan to get big and they plan to do it quickly,” he continued. “Therefore, they are setting up their financial systems and expense management practices in a scalable way, so that they can continue to grow their operations.”

For instance, startups are often preparing to eventually have investors take a look at financial data, or for auditors to take a peek at the books as they prepare for a possible initial public offering (IPO). This makes spend management a different beast for startups than for mom-and-pop businesses.

“That places a lot more importance on things like how the credit card integrates with their accounting system, and how easy it is to save receipts for corporate card expenses,” said Dubugras.

Brex has ventured into this market with a card product designed to meet the spending needs of startups that cannot get a card from their traditional bank, while incorporating enhanced expense management and data capture functionality that these entrepreneurs need. The company also offers a virtual card solution that Dubugras said is particularly useful for software subscription purchases. Key to Brex’s offering is its “dynamic limit,” he explained, that continually update startup customers’ spending limits instead of setting a cap at the time of underwriting.

Brex’s VC funding announcement served as the company’s official market debut and, moving forward, Dubugras said the company has other points of friction in startup payments in mind.

“There are some unique things that Brex can do around authorizing and approving transactions in real time by specific merchant, time, category and other things,” he said. “As we work with more startups, we will adopt our services to fit their needs.”



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