2014 TFM Year in Review – Part I

When you look back in 2014, there are several themes that impact the world of business credit.

The first of course is the rise of alternative lending products that go by such categories as online receivable auctions, private pcard exchanges, and peer to peer or marketplace lending. There are actually several dynamics in one so we will look at each separately.

The Year of Peer to Peer or Marketplace Lending (for Business)

We know the investor world is in love with consumer peer to peer lending (P2P). Peer to peer lending has become almost a feeding frenzy of activity. Prosper took 8 years to lend $1 billion. It took only 6 months to loan out the next billion. Now granted most of the peer to peer lenders are consumer credit, but many are now trying to get involved in business credit.

These P2P platforms work one of two ways, either they are pure pipes to connect funds suppliers with businesses needing credit, or they have access to lines of credit and have some skin in the game.

P2P providers are expanding into business loans—including LendingClub, OnDeck Capital Inc., Kabbage Inc. and CAN Capital Inc. Collectively they are growing fast (about $3 billion in loans for 2013 and set to grow even faster), compared to bank outstanding commercial loans under $1 million at federally insured banks, a proxy for small business, they are scratching the surface (report to be $284.5 billion in third quarter of 2013). But small business lending at banks is down on an absolute basis about 20 percent since the financial crisis, so marketplaces know the opportunity.

LendingClub just completed a successful IPO in mid-December. Given their current valuation of about $5 billion, it is viewed as purely a technology company, which makes perfect sense since they are not collecting deposits or making loans, just pipes. Like other tech start-ups, the market has margin for losses. While LendingClub lost more than $23 million in the first nine months of this year, it’s revenues have been more than doubling each year. OnDeck, preparing for an IPO made $788.3 million of loans, producing a loss of $14.4 million on revenue of $107.5 million for the first nine months of this year.

Peer to peer lending, or MarketPlace lending, its’ new moniker, is the domain of hedge funds, family offices and other large institutional buyers. This model is an innovation of how capital is now delivered to small time borrowers. Is 2015 the year the regulators take a harder look at these models? While the lending environment is friendly today, as these platforms chase growth, and more risky borrowers, and face perhaps a rise in interest rates, can they maintain their lofty valuations?

Online Receivable Auctions Prop up Everywhere

Electronic invoice marketplaces are internet-based platforms over which commercial receivables are actively traded through auction by and among buyers (“Investors”) and sellers (“Issuers”) using a third party platform to enable the auction.

These platforms are springing up in-country in many places – it started with theReceivablesExchange back in 2007 and has accelerated with Market Invoice and Platform Black in the U.K. and now we are seeing many more pop up in France, Germany, Sweden, and even Russia (mmm, side note, wonder what return investors would require to finance Russian invoices?)

These exchanges face tough challenges:

  1. Customer acquisition cost is high. Exchanges need a healthy deal flow to create an auction market. Most auctions are still relatively tiny relative to investor interest. Burn rates are high, and it is hard to scale.
  2. Focus on Blue Chip Obligors, many who will provide early pay options to their suppliers - Most exchanges for small business focus on Blue Chip finance, meaning sellers can auction invoices from recognized names, but when it comes obligors that are unknown, private, and hard to get data about, it is difficult.
  3.  Information asynchronicity - What verification comes from the Buyer/Obligor? Since there is not credit enhancement on these invoices, having information to verify the invoice back to the purchase order is important. Unlike seller networks, exchanges suffer from the problem of information asynchronicity. Meaning there is limited counterparty relationship data showing the spend history and sourcing TRE seller members and their customers (e.g.. length of trading relationship, dilution, when paid v. due date).


While the market for this form of finance is growing rapidly it is still in its infancy. To achieve a real break though involves overcoming the above challenges.

Private pcard Exchanges Disrupt Traditional Interchange Model

To counter the reliance on the credit card rails, the private pcard networks are looking to offer payments through the cheaper Automated Clearing House (ACH). This is precisely what various solution providers are trying to figure out to disrupt the commercial pcard model. If you can eliminate the interchange you have to pay the company whose rails you have to use (ie, Visa, Mastercard, Discover, etc.) you can than charge a more palatable rate to the seller while still giving the buyer his cake, or rebate.

We should see more of these solutions pop up in 2015, particularly in certain verticals.

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