Innovation Investment Tracker | November 16-23

A New Take On Commercial Lending Picks Up

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In the wake of the financial meltdown and resulting credit crackdown lending slowed, and in some cases ground to a screeching halt.  Among the hardest hit were small business.  The Small Business Administration  reports that annual loan dollars fell 18 percent from their peak of $659 billion in 2008 to only $543 billion in June 2011. By comparison, FI lending to all firms on declined by half that over the same time period.

Lending to small business has seen some recovery, but unlike consumer loans and lending to large enterprises, small business loans still lag behind. Some banks are still just being cautious. Others are reluctant to lend to internet-based “new economy” businesses for which they don’t have experience assessing the risk. But, as the bank doors have swung shut to entrepreneurs, alternative lenders have stepped in and opened theirs.

FastPay is one such alternative lender, though their focus is slightly more specialized than small/medium businesses as a whole.  FastPay operates a lending platform for companies in the digital media space, which, COO Secil Baysal told MPD CEO Karen Webster, is a subset of business that has an especially sharp need for alternative financing.

“There are certain aspects of the digital media online mobile business that make it even more interesting for alternative lenders.  First, payments terms in this industry are really long.  Big brands typically pay 90 or 120 days or more later. That obviously increases the demand for liquidity.”

But there’s an even bigger obstacle that these businesses face. Traditional financing channels do not yet have the tools to evaluate risk fairly when it comes to players in the digital economy, Baysal explained. “A lot of these businesses are part of the new economy which means they don’t have hard assets and physical  locations that they can put up for collateral,” Baysal said. “Most traditional lenders like to see things like that for their loans and those things do not exist when you’re operating a mobile network, for instance, or building apps.”

That’s where Fast Pay’s platform steps in and use their proprietary algorithms to establish the creditworthiness of their potential lendees.

“Our core product today is a receivables-backed finance product which basically means we lend to companies against the AR they have from their digital platforms, big brands and media agencies,” Baysal explained. “Because there’s nothing physical, we can’t go and check or count things on the shelf in a store. So we, instead, use data and technology to verify the underlying asset that we lend against.”

FastPay clients need these funds for use as working capital. Baysal gave an example of the FastPay platform at work.

Suppose an app developer creates the next Candy Crush. The good news is that people love the game, and itsoars to the top of the app store.  The bad news is that now the CEO needs to keep it there and that requires capital investment. Those investments are hard to make if invoices won’t be paid for 90 to 120 days.

“Often times these business have spikes and demands and big contract and big surges that require very quick access to cash, Baysal noted.  “With our model we can lend the next day on the receivables that they’ve already generated – which means that businesses can  cycle the same cash many times within the same month or year without being constrained by cash flow.”

Fast Pay loans are typically in the $250k to $500k range. That seems surprisingly high and atypical of most alternative commercial lenders. Baysal said that no one should be surprised since FastPay is making loans secured by receivables assets and the it doesn’t take companies in this space long to rack up a lot of receivables over the 3-4 months they typically wait to get paid.

“Media is a $600 billion business of which about $100 billion now is digital and growing rapidly. Mobile and online are growing at 20 percent plus each year and that’s the part we are focused on.”

Helping with that growth is their first equity capital raise of $15 million–bringing the total amount invested in the FastPay platform over the years to roughly $50 million.  With that new cash infusion, Baysal says the time has come for FastPay to expand.

“We’re building a pretty sizable technology and data team and we just started our first launch in in the U.K. Part of this round will fund some international growth. The business we work with and in are very global, and so our business needs to be too.”

It’s a big job, but one that Baysal is comfortable taking. Before signing on as FastPay’s COO, Baysal ran the thin file credit portfolio for Capital One and as Green Dot’s GM of its Network Business.

“There’s actually a common theme,” Baysal said. “The common theme is really finding segments and products where traditional banks and traditional models do not work well.”

Commercial lending to digital media companies is one such area where traditional lending isn’t working. “You have this great segment and great client base that’s not getting the ‘credit they deserve’ from traditional lenders, Baysal reflected. He and the FastPay team have the platform and the products, he believes, to create a desirable alternative.

Weekly Breakdown

FinTech investment was less active in the third week of November than has been this month so far.  All in, there was $550 million in activity spread across investment types, down from the previous weeks ~$4 billion.  Granted much of that total was contributed by a single investment during the time period, the acquisition of Susquehanna Bancshares by BB&T Corp. for $2.5 billion.  However, last week also trailed slightly the first week of November’s total investment activity of $575 million.

Strategic and venture backed investments were responsible for $369 million of the total, or 82  percent of the dollars flying around the ecosystem.  The biggest play out of  VC/PE this week was Comvest Partners investment of $100 million in debt funding in Travel Holdings. The Travel Holdings investment was also the biggest  move in commercial payments investments in the third week of November.

The biggest overall move during the week was the acquisition of Change Healthcare by Emdeon Inc. for $185 M.  In the second and third spots for VC/PE activity this week are Andreessen Horowitz , with $50 million invested,  and Vertex Venture Holdings Ltd., with  $30 million.

Retail payments continued to command the majority of the week’s activity again capturing 67 percent of investment spend. Security and fraud and customer acquisition and loyalty were retail investors’ favorite places to send dollars this week – they accounted for 87 percent of the total.  Bringing up the bottom of the list were P2P payments, digital wallets and prepaid.

The median investment amount was $1.6 Million.