‘We never stopped originating during the pandemic – we kept serving our customers through it’: Fundbox’s Prashant Fuloria

Many of the firms we cover are moving towards becoming a one-stop-shop for their customers. Looking to deeply service their constituency, they’re converging on becoming banks – whether or not they actually have a license. At least, they look and smell like banks. 

Fundbox, a provider of financial services to small businesses, isn’t necessarily going that route. It’s staying particularly focused on serving its clients’ cash flow needs with working capital – so it goes beyond what a traditional lender might do. But it’s not taking the plunge fully into banking.

The firm’s CEO Prashant Fuloria joins me on the podcast to talk about how SMBs are coping with the pandemic’s challenges and how Fundbox has evolved to serve them. We also catch up on where the firm is in its own growth cycle. Fundbox has grown – it surpassed a $100 million run rate last year and raised $100 million in a Series D round, valuing the company at over a billion dollars. Lastly, we look out into the future to see what Fundbox is cooking up. 

Here’s my conversation with Fundbox CEO,  Prashant Fuloria. 

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The following excerpts were edited for clarity.

The big idea

Fundbox is a financial platform for small businesses. And what I mean by that is we have built a platform using technology, and in particular AI, to deliver financial services to small business owners to help them better run and grow their businesses. We offer a variety of tools, especially on the financing, credit and payment side, to help these small businesses grow and reach their full potential.

Working capital

We think of ourselves as a company that is building a number of products across the financial needs of our customers. We've definitely got a deep focus on credit – and in particular, short term working capital. The origin of the company was around unlocking all of those capital assets that were locked up in unpaid invoices to small businesses. So we really started off by helping companies unlock those funds that they could use to run. 

And from that very core of working capital, we've expanded both towards more conventional credit, and longer duration term loans, but also deeper into payments, where we launched a payables product that helps our customers make their critical business payments. So we are definitely online. We're a digital company – customers use us exclusively on our web and mobile interfaces. And we do have a credit component. But more broadly, we’re focused on financial services with an eye on cash flow for our customers, so it goes beyond what a traditional online lender might provide.

Not a bank

We're providing more and more services to our customers to help them with their cash flows, but we don't necessarily see ourselves as being a full fledged alternative for a bank. That's not our current goal. There's a lot of value that we can add across these products that typically are used in concert with a bank. So to give you an example, we have a working capital tool that lets our customers connect their business bank account to Fundbox. And within minutes, they get access to credit on tap, that is served up to an ATM-like experience, except that our customers are drawing funds from Fundbox, as opposed to a bank account. They're using the bank account as a source of data, in much the same way as a customer could connect their accounting software, have a look at their account receivables, and then draw funds against their invoices, except that we're using the invoices as a source of data as opposed to factoring their invoices. 

So we provide all of these tools for our customers to be able to get access to funds, to be able to make their payments. But, at this point in time, we're not necessarily trying to rebuild or build out the entire set of capabilities that a bank would provide our customers.

The SMB customer

We serve small businesses. I'd like to highlight a couple of things that are particular to our customer base. First of all, we serve the smaller end of small businesses. So the word SMB in the US covers businesses as small as sole proprietors, all the way to 500 employees. We serve small businesses that are typically sole proprietors to businesses that have up to a few dozen employees. So businesses that could be making as little as a few hundred thousand dollars in revenue, all the way to a few million dollars of revenue. 

But the other thing that's perhaps a little more unique about what we do is that we serve a lot of B2B small businesses – small businesses that serve other businesses. So you and I, as consumers, when we think small business, we often think about B2C small businesses, because we are consumers. We think about a restaurant, for example. But for every restaurant, there are many businesses that provide services or products for them, like people bringing food from the farm to the restaurant, or people that provide feeding or staffing services. So it turns out that in the US, there are about 20 million – so 20 million out of the 30 million – SMBs in the US that are actually B2B in nature. And that's a lot of what we focus on. 

These B2B small businesses have some of the same challenges as everybody else: they have to hire people, they have to acquire customers and all of that. But in addition, they invoice their clients, and then they wait to get paid. And so if you were to add up all those unpaid invoices that are due to a small business, typically a B2B small business, that's about a trillion dollars in the US alone. So unlocking that trillion dollars was the original idea behind Fundbox and something that's still a big part of what we do.

Current product portfolio

Today, the Fundbox platform provides a few things. The core of what we do is working capital, so depending on your needs, depending on how you're connecting with Fundbox, each of our customers has connected some business system to Fundbox, sometimes more than one accounting software system and invoicing app, ecommerce platform or just your business bank account. Depending on the data connections, we offer different experiences. So you could be opening up the Fundbox mobile app and drawing funds directly, or you could be accessing us through some of our partners such as QuickBooks, where we are embedded into their experience, and drawing funds inside the QuickBooks experience, but working with Fundbox. So there's a core of working capital. 

In addition, we’ve been ramping up over three other things over the course of last year. There is longer duration credit. So we launched a term loan product back about a year ago, which is doing extremely well. 

We launched a product called Flex Pay, which is this payables product where our customers are using a virtual account that we provide to them inside their payroll systems or their bill pay systems to be able to get flexibility and peace of mind with their payments. If you're a business owner, you need to run payroll. But when Friday evening comes, you don't know if you have enough money in the bank account that you've connected to your payroll system to make sure that your payroll goes through. Then there may be a check coming in from a customer that has been deposited, but you're not sure if it has cashed out or not. And so, very often our customers have to figure out how to deal with the timing of incoming and outgoing cash flows. We simplify all this by giving the customer a virtual account that they can put into whatever systems they're using. And then they use the Fundbox platform. We're making payroll on their behalf – the payroll transaction comes to us, and we fund it. and we give the business owner some flexibility around how they want to fund that transaction, including mixing and matching different bank accounts, putting the transaction on their card, or paying it off in easy installments. 

And then recently, we added another thing to our platform, which is Insights – just giving a customer very, very simple views into their forward looking cash flow, so that they have some sense of what their cash flows might look like over the next few weeks, so that they can take action accordingly. 

The challenge of SMB cash flow

As a small business owner, and especially as a B2B small business owner, you're always dealing with the timings of cash flows. Your expenses are often incurred upfront, when you're delivering a product or a service to your clients. And oftentimes, those expenses have to be paid, whether those are payroll or inventory or supplies, not to mention other things like rent and insurance and so on. But your incoming cash is typically against an invoice, which has terms associated with it, like net 30 and net 60 and so on. 

That timing difference does create a lot of stress. Not only is there this difference between incoming and outgoing, there's also the uncertainty that a customer might end up paying you a little bit later than they expected. And that throws a bunch of things out of whack. 

One thing that is sort of ironic is that these problems are worse for growing businesses. Because when you're growing, you're incurring expenses up front, and then getting paid later. That actually hurts you more when you're growing. So ironically, the businesses that are doing well, because they're acquiring customers and they're serving them well, are the ones that often need working capital solutions the most. We've spent a lot of time understanding B2B transactions to able to assess the risk of any particular transaction.

Pandemic dynamics in lending

When COVID hit in March 2020, we saw stress in our customer base. We saw a 35% drop in invoicing volume within weeks. There was pretty significant stress in the small business economy, not just with our customer base, but more broadly. Our approach to serving customers is very automated. We don't have human beings looking at numbers and making decisions on customers. We have people that build systems -- machine learning models that take data from our customers’ systems and make predictions. Those predictions are converted into decisions through software. So we've built these automated systems that just keep looking at our customers’ businesses and then assess what's going on and give them the appropriate financial product. 

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So when COVID hit, we were able to continue serving our customers in a responsible way, and in a very surgical way, because different customers ended up having different needs for capital at that time. One thing that we're particularly proud of is that we never stopped originating during the pandemic – we kept serving our customers through those three or six months of really difficult times back in 2020.

And just by contrast, many folks that provide capital to small businesses stopped originating, either temporarily, or in some cases permanently. It wasn't just the small or the independent providers of capital. Even some of the larger tech platforms that have capital arms ended up pausing their originations. So six months into the COVID crisis, I think we had validated our approach to serving customers, which is a combination of the data we get from them, the AI that we use, and the products we offer. 

2021 and customer growth

With that knowledge and validation, we really started accelerating our customer growth coming into 2021. Last year was a year of incredible growth for the company – we feel very confident about the solid foundation we're building our business on. We crossed the $100 million in revenue run rate, and we're well past that at this point. We were just seeing so much opportunity that we were encouraged to raise more money so that we could continue adding more and more customers and also continue expanding our platform with new products. We raised $100 million in our Series D round and are at a $1.1 billion valuation. And, you know, towards the end of last year, we had connected with over 325,000 businesses, and had transacted over $2.5 billion on an all time basis. So, we really hit some very significant business milestones along the way. We're coming into 2022 with a lot of momentum.

Credit model during COVID

We were motivated by the fact that our performance in terms of credit remained very strong through COVID. If you look at delinquencies to judge credit performance, for example, those numbers remained in the single digit percentage ranges – they went up a little bit, and then came down in about a couple of months. So we never saw a huge spike in delinquencies. And by the middle of the summer, we were back at pre COVID levels, even though COVID was still very much a thing until today. So the fact that we kept our delinquencies under control gave us that validation that we could continue serving our customers in a responsible way. 

By contrast, delinquencies were exploding in the industry, rising 3x  to 10x the amount pre COVID. While our delinquencies peaked in the 9% range, let's say, we saw players with delinquencies in the 60% range. Those folks were hurt very badly and had to take their operations offline and stop serving customers. 

We did participate in PPP. We were not a beneficiary of it. We didn't do that for ourselves, but we did lead our customers and other small businesses who later became our customers to get funds through PPP. We originated a few 100 million dollars. We didn't go all in on PPP with the goal of just maximizing revenues from that program. We did it to support our customers and as a way to bring new customers onto our platform.

Expanding

We're at a very interesting point in the company where we're growing both our customer base and our product offering. And typically, as companies get larger, they slow down their growth, but we're accelerating into 2022. We plan to use the funds definitely to acquire customers. We're just seeing so much traction, both in direct acquisition, which is a big part of what we do, which is acquiring customers directly through our website or through our mobile app, but we're also seeing a lot of traction on the partnership side. So an important part of Fundbox Is that roughly half our business comes through partners. And wherever possible, we are tailoring our experience to match the workflow of the partners that serve small businesses. Think of Intuit and its QuickBooks product as a great example, or FreshBooks. We're also in the Synchrony Merchant Center. All of these partnerships are driving more customer acquisition. 

We are also seeing some really interesting early traction with banks, where banks whom you might think of as being competitive to Fundbox, are actually coming to us and saying, Hey, you do a really good job of serving small businesses. For us, small businesses are stuck between our consumer business and our commercial business. Can you provide the technology and the user experience and the product experience for our customers? We can bring our customers and our balance sheet. So that's another area where we're investing in. And we're also investing in expanding our platform further. 

And, we’re adding more products. We're just about to launch a membership product, called Fundbox Plus, where customers pay a monthly membership to unlock new features on the Fundbox platform, get a higher level of service, preferential pricing, and so on.