There are a couple of ways to skin the online SMB lending cat: sure, you can provide straight-up loans to small businesses in need of capital. But, there’s a growing trend of what are called supply chain lenders — financing firms that provide cash to help grease the wheels of commerce.
Some of these lending models work as a three-way balancing act, providing cash as the connective tissue between buyers and sellers. By inserting themselves in the supply chain of both interested parties, everyone typically wins. Sellers have conflicting priorities. Of course, they want to get paid ASAP but they also understand that today’s buyers want, or require, flexibility in their payment terms. Supply chain lenders can help suppliers get paid quicker, provide beneficial payment terms to their customers, without taking on any credit risk.
“Cash flow patterns vary significantly among small and medium size businesses, so one-size-fits-all doesn’t work. For some businesses, reasonably priced supply chain financing can be the best solution,” said Ann Marie Mehlum, associate administrator for the SBA’s Office of Capital Access.
Supply chain financing makes acquisition easier, cheaper
In a way, supply chain lending is a better mousetrap. It’s really hard for a standalone lender to profitably bring in new borrowers. That’s why leaders in the space are partnering with incumbents, to help with acquisition costs. OnDeck did just that with its partnership with JP Morgan.
Supply chain finance firm, Behalf, has built an interesting distribution model. The firm works with suppliers to act as a financing option for their SMB customers. SMBs can take out a loan with Behalf to finance a purchase and Behalf pays the supplier immediately for its wares.
“Our value proposition is a win/win for customers and merchants – it helps customers optimize their cash flow, so they can buy more, which then increases merchant sales,” says Crystal Eastman, Behalf’s head of marketing, “so our product effectively sells itself.”
Instead of sending millions of direct mail pieces per month like many marketplace lenders have done, online lenders like Behalf are finding that they can lower acquisition costs by identifying and incentivizing suppliers to spread the word to potential borrowers. In this model, Behalf’s online approval tools can be integrated in a site’s checkout process, so that by the time a customer reaches checkout, he’s already approved for a short term loan.
It’s similar to the strategy used by consumer lenders like Greensky, Bread and Affirm who are signing partnerships with retailers to integrate their credit products at checkout.
Online lenders embed themselves in the distribution channel
For lenders like Behalf, good marketing isn’t a splashy ad campaign or a gaudy billboard in Times Square. Acquisition is about completely understanding the needs of vendors and buyers across different industries. Once the ecosystem is understood, then it’s about embedding themselves in their distribution channels so that their product spreads virally from organic peer-to-peer recommendations.
The upstart lender can cite numerous examples of an SMB customer introducing its lending product to a vendor and the vendor eventually rolling out Behalf’s financing options more broadly to its customer base.
“You can reach out to buyers who then bring the sellers, and you can reach out to sellers who then bring the buyers,” says Behalf co-founder and CEO Benjy Feinberg.
Build trust by partnering with incumbents
It’s unclear just how many small businesses in the US are taking advantage of financing solutions that take both SMBs and their vendors into account. Another way to scale the acquisition fence is by partnering with a more established financial partner. In Behalf’s case, it was MasterCard.
Behalf is set to gain further national exposure when the credit card firm, along with data proivder, Comdata, rolls out an offer to SMBs for alternative payment terms to be used at vendors that accept MasterCard. Similarly, that should entice MasterCard-accepting vendors to join Behalf’s vendor platform.
“Our partnership with MasterCard will have tremendous utility for our customers and allow them to access additional purchasing capacity with more flexible terms at vendors they may already be paying via MasterCard,” Eastman explained. “We have big plans for our MasterCard feature and it will become a more core part of our marketing and product strategy over the next six months.”
Danger, Will Robinson?
The MIT-Zaragoza International Logistics Program, in Zaragoza, Spain, found that growth in supply chain financing could raise the risk profile of businesses to dangerous levels, and could even cause a systematic financial failure. These concerns mean that financial institutions engaged in forms of finance like reverse factoring and alternative SMB financing companies like Behalf will probably face the regulatory music in the near future.
In the meantime, Behalf can congratulate itself on the fact that it hasn’t had to do a lot of follow-up marketing. “They usually come back by themselves,” says CEO Feinberg. “It’s like asking why people use a credit card again and again? Because it works.”
Tradestreaming’s Hadas Tayeb contributed to this article.