‘Banks can look at you and say, we don’t want to look at you’: Payability wants to serve the seller-entrepreneur
- Payability, a company that finances online SMBs, saw major success over the course of the pandemic.
- But creating a risk model that can shift and swerve through the world of seller sites is a challenge.
With small business booming and ecommerce exploding, financial service providers are finding potential in the overlap.
Payability, founded in 2013, offers financing and payment solutions for ecommerce sellers. New businesses that sell through Amazon, Shopify, Newegg, Walmart, eBay, among others, can apply for an advance on payments or loans to help pay for business expenses through Payability, embedded in their marketplace accounts.
The primary goal of Payability is to zero in on ecommerce companies that are just starting out in the business and may not have enough history in the game to apply for bank loans.
“If you're an online-only business, and you are thinly capitalized, and you've been in business for less than two years, you're not necessarily profitable every single month,” said Keith Smith, co-founder and CEO of the company. “These are all recipes for a bank to look at you and say, we don't want to look at you.”
With the rise of entrepreneurship and online shopping, Payability has seen a lot of growth over the course of the pandemic.
In October last year, the company announced it surpassed $3 billion in funding to seller-entrepreneurs. A third of the funding came in 2020 alone.
As a whole, Payability provided $1.4 billion worth of funding to ecommerce sellers in 2020. Its revenue that year rose by 40% compared to the year before. The company expects similar growth over 2021.
The idea behind Payability came from Smith’s own experience as the grandson of an entrepreneur whose business failed because of lack of funding.
Smith’s grandfather had thought of a different way to manufacture cinder blocks. His business was successful at first, but after a couple of years, he ran into cashflow troubles and wasn’t able to keep his business running.
He then spent almost a decade taking up low-paying jobs to pay back the creditors he borrowed money from, leaving him and his family in poverty. His idea for manufacturing cinder blocks ended up with a competitor.
The story being told repeatedly to him when he was a kid is what inspired Smith to start Payability. He wanted it to be a solution for entrepreneurs running into cash flow problems.
“There's this whole new breed of ecommerce sellers -- about four and a half million in the US today. And like my grandfather, many of them are not very experienced business people,” said Smith. “But they have good ideas, and they have a business to run. And we are here to help them to make sure that they have operating capital.”
One of the solutions Payability offers is Capital Advance. Companies can apply and get up to $250,000 for inventory and marketing spending. To qualify, merchants need an average of $10,000 per month in sales and a 9-month selling history. A typical instant advance tends to be around 75% to 150% of one month of marketplace sales revenue.
As merchants sell, they return a fixed percentage of around 12% to 25% of their sales every week back to Payability until the full amount they owe is paid, including the instant advance and future receivables. The merchant also pays a fixed weekly fee, which tends to be around 0.5% to 1% of the total instant advance plus future receivables they owe. There are no origination fees.
If merchants pay everything early, they get a rebate of the fee for each week they made the payment earlier.
The other service the company offers is accelerated daily payouts. To qualify, merchants need to have $2,000 per month in sales and 3 months’ worth of selling history. They can then get 80% of a payout the day after a sale has been made instead of waiting for two weeks to get it from the seller. The service also includes transferring the funds from the Payability account for free through ACH or wire. The standard pricing for this is 2% of total gross sales. Sellers with over $100,000 per month in sales can get special pricing discounts.
Merchants can apply for these services with their marketplace accounts. The funds can then come pretty quickly. According to Payability’s site, it can be as fast as one business day. Though Payability does conduct background checks before transferring funds, it doesn’t conduct credit checks.
Business owners can use the money they get from daily payouts and capital advance through a card dubbed the ‘Payability Seller Card’. Once activated, merchants can immediately spend using their online card. They receive a physical card 7 to 10 business days after signing up. They also get up to 2% cashback on purchases made with the card.
“It creates a really nice financial incentive for the customer, but also eases their ability to be able to get that cash into the hands of the folks that are actually going to be driving and growing their business for them,” said Smith.
Providing custom lending services for ecommerce startups could be a promising revenue path. Square, PayPal, Payoneer, Shopify, and InstaPay are all companies exploring this road.
But alternative lending models are still a bit blurry. For Payability, one challenge could be matching its lending model to the marketplace model. Seller marketplaces have their own rules. Amazon, for example, can suspend merchants for low performance, which means businesses can get hit with Payability fees even when they can’t access their payouts to pay them. And that can lead to some frustrated customers and a pretty bumpy revenue stream.
Still, Smith seems adamant about making sure Payability’s services stay embedded in customers’ marketplace accounts.
“It makes their lives easier and fits in with this overall theme and the mission of the business, which is to continue to remove that financial perch and progress perch.”
As for future plans, Smith couldn’t share much, though late last month the company expanded its marketing and sales team and hired Anas Sohail, former head of growth at Stripe, as head of sales.