The Canadian P2P industry is yet to be established when you compare it to the hyper-funded American alternative lending ecosystem. A major reason for the discrepancy between the two neighbors is the restrictive view taken by the Canadian regulators. The lending on P2P platforms in Canada has been, until recently, limited to financial institutions and accredited investors. The image below represents the size of the Canadian P2P market.
Source: Alternative Finance Benchmarking Report 2016
An example
FundThrough is an invoice funding platform, taking cognizance of the regulatory thaw towards alternative finance and also leveraging the first mover’s advantage for a strong competitive position. The Ontario-based fintech platform was founded in 2014 by Steven Uster(CEO), Deepak Ramachandaran(CTO) and Graham McBride(Chief of Credit). The company has been able to raise $2.2 mil in pre-Series A funding from a group of investors led by Real Ventures; the largest VC firm in Canada.
Market leader
Though the major buzz in Canadian alternative finance market is for consumer lending start-ups, FundThrough has been able to create a market leadership position in B2B funding segment. With currently being the only invoice funding platform in Canada, it is not only a market leader but its actions also help define the entire category.
Company’s offering
The company’s can fund an invoice from $1000 to $1 mil. Such a broad range enables the start-up to cater to a wide variety of clients. The company has integrated its product with cloud-based accounting platforms, for a better understanding of the borrower base. Uster has previously founded Eldridge Capital, which is also a specialist in loans against receivables. His experience in the space helped him shape FundThrough to be a tech disruptor which will shorten the loan process for prospective borrowers from months to days. The company wants to help improve the cash flow of enterprises and help them achieve better control on their account receivables. They are different than factoring as the borrower can choose which invoices he wants to fund. The businessman does not need to fund the entire book and there are no minimums. But to add protection to its investors, FundThrough financing is with recourse. So if the borrowers’ clients do not make the payments for any reason, FundThrough has the legal recourse towards the borrowers as well.
The company’s growth
The invoice funding platform has been on explosive growth, topping $30 mil in lending since its June 2014 launch. The company has grown 10X in 2015, a particularly important indicator for growth in the VC industry. They have 15 people in the team and have funded over 10,000 invoices to date. The average invoice ranges from $1000 to $100,000 and the average outstanding is around $50,000-100,000. The company charges interest in the form of a “waiting fee”. So when the borrower draws his funding, he has to pay a daily waiting fee on the amount outstanding. The platform currently sticks to funding invoices to big box retailers, Fortune 500 companies and Government Agencies. Its starting waiting fee is 0.027% per day, which translates to 10% annualized. The APR can go up to 18% annualized. The company earns its revenue by charging a transaction fee from the borrower and a servicing fee from the lenders. The lenders on the platform are all high net worth individual investors, hedge funds, family offices etc. The company can’t have unaccredited investors due to the regulatory policies in Canada and also needs to take province by province approval for its business. Though the company is funded like a marketplace with lenders on one side and borrowers on the other, technically the assets and liabilities are on the balance sheet of FundThrough with underlying invoices the only security for the lenders.
Return to investors
The company has given net 10% returns to its investors, which would attract the interest of a lot of yield-hungry capital. To expand its user base, it is focused on targeting not only product based companies but also service providing enterprises. The invoiced products range from screws to nutrition bars and services range from janitorial to high level consulting services. In fact, 60% of its users are service based and 40% are product based. The company has been able to expand the market, with the majority of its customers never having even considered factoring services. A case in point is a company which shovels snow for big box retailers. It is paid within 45 days but the company has to pay the workers right away, creating a cash flow mismatch for the entrepreneur. FundThrough helps it fund the invoice and manage its payroll in a more effective manner.
Invoice funding
Invoice funding platforms are mushrooming in the United States because of the immense opportunity to finance invoices aka sales to creditworthy buyers. Though Canada is in its infancy with alternate lending, FundThrough has demonstrated market leadership in the b2b segment. Along with market leadership, the ability to work on the right side of Canadian securities law is also an important lookout for investors. A Candian P2P lender-LendingLoop has had to pay the price of advertising that lenders can be non-accredited investors, even when it did not have the proper regulatory clearances. This has snowballed into the start-up having to halt new loan requests, an effective death knell for a young organization. The founders of FundThrough are experienced professionals and Steve Uster understands the market and the borrower base due to his prior experience in receivables financing. This pedigree will come in handy especially when dealing with the regulators. When the Canadian market grows big enough for financial institutions to be interested, VC money would come pouring into the sector and FundThrough is positioned to be the beneficiary of a massive tailwind.
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