Amid the talk of filling in the small business (SMB) financing gap banks have left since the financial crisis, the rush of FinTechs, alternative and marketplace lenders coming to market may have left another business segment behind: the middle market, particularly the lower middle market. It’s a space that, in many ways, is a bit of a hybrid between small businesses and large enterprises.
Similar to small businesses, said Albert Periu, middle-market firms struggle to not only gain the capital they need from traditional financiers; they’re also burdened by paper-based manual processes in the application and loan management process.
Periu is CEO and co-founder of Neptune Financial (NepFin), one of the newer lending companies in the U.S., and one that is taking on middle-market borrowers with between $10 million and $100 million in revenue. Periu, who spoke with PYMNTS’ Karen Webster about his experience building out the platform, explained that his years at Funding Circle led to revelations about a lack of efficient financing options for this segment of borrower.
“There is a lot of interesting technology in the small business segment, but my earlier time in traditional commercial lending, followed by four years at Funding Circle, opened my eyes to the white space that was the middle market,” he told Webster. “There weren’t many FinTech or digital solutions for this segment. It’s a very manual process — it really struck me.”
Periu, who served as global co-head of Capital Markets at Funding Circle, launched NepFin in late 2016 alongside Co-Founder Thomas Meister, former senior counsel at Funding Circle too. Periu said he realized that, in a way, the middle market is underbanked, forced to deal with manual lending processes at traditional financial institutions (FIs) or to face more expensive financing from private credit funds the executive said never really got the memo about the technological revolution in the lending industry.
The company is a hybrid lender, taking on some risk as a direct lender as well as working with other financiers to link middle market companies with working capital loans up to $60 million. In this way, the CEO said, NepFin is able to take advantage of what he considers to be the direction toward which the industry is headed.
“We’re a hybrid lender, which we think is the natural evolution,” he said. “We’re not looking to replace banks. I’ve always had the sentiment that this can and should be collaborative.”
That means allowing middle-market companies to retain their relationships with the traditional FIs they already work with, while also filling in that “white space” and injecting automation into the lending process that many FIs today simply cannot do. Periu said this process means automating things like document collection and, especially, enhancing data aggregation and analytics.
“This was born out of seeing what it takes to underwrite a small business and understanding the opportunity of additional information sources,” he said. “When you think about what a small business has in assets, a lot of it is on the personal side.”
Quality of earnings reports and analysis are fundamental in this market, the executive added. This presents an opportunity for technology to enhance data collection and automate many aspects of the lending process, but Periu emphasized that technology isn’t going to replace humans in this market.
“This is about augmentation,” he said. “When it comes to credit underwriting, data collection will make things more efficient — document collection will be more efficient, for example.”
He noted that a layer of technology can be added on top of existing, human-powered practices so that when a middle-market company’s application does land on a person’s desk, it’s already passed through a layer of technological screening and data analysis to ensure that lenders are focusing their energy on the borrowers most likely to be a good candidate.
“The middle-market community is looking for digital solutions to make their life easier — dashboards to keep track of transactions, to store documents. In this space, this is something that hasn’t been seen,” he said. “But we’re not trying to replace humans. It’s about connecting with humans, letting these people know we’re here for them.”
NepFin has its eye on enhanced data analytics and underwriting in the future, and earlier this week the company revealed $10 million in Series A funding led by Sands Capital Ventures. A slew of existing investors also participated, according to a press release.
The meshing of technology and human expertise, coupled with a hybrid lender business model, is a way for the company to address the complex demands of the middle market that are often hybrid in nature themselves. While these borrowers are far more sophisticated than SMBs — meaning lenders have more data to work with in the underwriting process — they’re also struggling with the same manual processes that have plagued SMB borrowers in recent years. And while the middle market wants technology and digitization, they still need a human connection to their financial service providers, Periu said.
With the new funding, the CEO told Webster that NepFin will be focusing on its core infrastructure, enhancing data analytics capabilities and adding a few new team members. Further on, the company will explore direct partnerships with banks and the possibility of licensing the NepFin platform to traditional FIs.
As the company progresses, it will have to apply its hybrid business model in more ways than one; its CEO explained that there must be a mix of humans and technology, a balance of FinTechs and traditional players and a multifaceted approach to an underserved market.
“It’s about being thoughtful on the approach to the middle market,” said Periu. “I can’t stress enough: Having the right folks in place — from traditional lending, investing, legal and regulators — and to take these learnings from our past online lending experience, it all comes together. It’s lost on us why this has been a white space. It’s more difficult than launching a consumer or small business lender, but by bringing the right discipline, it can be done.”