B2B Marketplace Vendors Amazon, Paypal Finance Volume Underwhelms

Captive B2B Marketplace lenders look to mine data to finance sellers

 

The traditional Captive Finance companies – such as Deere Capital, CAT Financial, or GE Capital helped finance their vast subsidiary sales with various dealer and distributor finance programs. The capital markets have been challenging to these Captives since the Financial recession. One of challenges – choosing where to put their balance sheet, depends on the relative returns of keeping assets on the book or doing some securitizations to eliminate capital constraints in this new age of higher cost of funds and more capital requirements.

One thing for sure, they are big and rely on sophisticated investment banking techniques. 

But now, B2B marketplaces and payment processors are mining data from their networks to target companies deemed creditworthy to create a loan book. This loan book is different than the traditional small business loans generated by banks, as the loans are generated based on sales on the platform. Typically at least 10% of original loan amount is due + loan fees every 90 days.  So far, the results have been underwhelming.

In Amazon’s case, they have identified more than two million active sellers to offer advances of between $1,000 to $750,000 payable within one year. Right now, they are just scratching the surface. The Seattle-based e-commerce giant released information that it lent more than $1 billion to small businesses in the last 12 months and more than $3 billion to over 20,000 merchants since inaugurating the programme in 2011. That is just a 1% penetration, so not a big score yet for the behemoth from Seattle in 6 years.

Both Paypal and Square seem to have similar results. Paypal has funded over $3 billion in financing to more than 115,000 businesses worldwide since 2014 and Square claims to have lent $1.5 billion since launching its own programme in 2014.

While not shabby numbers, these are not numbers that threaten banks.

Why have they struggled to generate significant book?

A large bank can generate that in very short time. Is the offer not compelling to these merchants?  Amazon doesn’t usually get involved with an opportunity unless it believes it can disrupt and displace. I don’t see that happening here yet.

What makes this a powerful tool for these B2B marketplaces is the cost of acquisition is much lower than a typical FinTech company. But the challenge is the lifetime value of a customer is low if you only have one product.

Banks can offer a full suite of small business lending. SMB lending suite can be comprised of:

    • Purchasing cards (sometimes the easiest thing to get from your banker is a 10K or 25K card),
    • Term loans,
    • Line of credit,
    • Equipment leases,
    • Inventory & receivable finance (ABL, single invoice finance, etc.)
    • Working capital loans

I like that these B2B Marketplaces provide another option for small business to access cash quickly without going through the onerous credit policies and documentation requirements from the banks. But I don’t think their loan books will compete with the largest of smb bank lenders for the reason above.

Again, I still think Amazon’s bigger opportunity is displacing credit bureaus for B2B, but that’s another story. Perhaps time will prove me wrong.

What do others think?

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First Voice

  1. Fred Steyl:

    David,
    Fully agree on replacing credit bureaus. They rely on historical data to be uploaded to them by their customers (in SA anyway) which is self-limiting, whereas on-line portals enjoy data based on live transactions as they happen. Way to go- early days.

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