Analysis Featured

Creating a New Market for Invoice Financing

invoice financing

We see so many great businesses failing to take off because they are unable to get funding from legacy financial institutions and high-interest rates charged by alternative lenders deter them from seeking credit. Their growth is perennially hampered by slow paying customers, which leads to cash flow issues. Realizing that there is a funding gap for startups and growing companies, Gabriella Krista Morgan, with her father Bruce Morgan, launched P2Binvestor, a crowdfunded receivables finance company operating an investment platform for small- and mid-sized businesses.

P2Binvestor was founded in 2012. Its headquarters is in Denver, Colorado. The firm has raised over $16 million in various funding rounds with Rockies Venture Club taking the lead in Series A. Though the company was launched in 2012, it took two years of groundwork (raise money, infrastructure, legal framework, etc.) to bring the platform to market. CEO and Co-Founder Gabriella Krista Morgan has a degree in economics and political science from McGill University. Prior to founding P2Binvestor, she was accounts director at SapientNitro.

P2Binvestor’s Business Model

P2Binvestor provides lines of credit (LOC) from $250,000 to $10 million backed by the borrower’s receivables and inventory. Companies that are growing quickly but do not qualify for funding from banks because they do not have several years of operating history and cannot afford high-interest rates charged by online lenders is the target market.

The platform follows an asset-based lending model and has also developed in-house technology to facilitate management of LOCs. Traditionally, managing LOCs has been the Achilles heel for both lenders as well as borrowers. Therefore, P2Binvestors was focused on building a modern borrowing experience and a sophisticated technology that is capable of early detection of problems in underlying invoices. Through constant monitoring, it is able to resolve problems before they snowball into defaults.

It has extensively used machine learning to identify patterns in data and has used its own data for developing an algorithm focused on loan performance rather than upfront underwriting. That means financing offered by P2Binvestor is quite different from the traditional term loan. Since P2Binvestor is constantly lending, its underwriting process is constantly developing and thus minimizing the default risk.

Depending on the value of their invoices, a customer can borrow ranging from $250,000-$10 million. But on average, the firm lends around $1 million on average. Based on outstanding balances, the borrower pays daily interest and APR ranges from 15%-19%. The customer only pays for the amount used and not on the total LOC limit.

Bank Lending Program

The company has also launched a Bank Lending Program. Under this program, it partners with banks to lend to companies that have growth potential. Launched in 2017, the company has found its first partner, New Resource Bank. The bank will provide P2Binvestor’s products using P2Binvestor’s technology. The loans will also be managed by P2Binvestor; the rate of interest ranges from 8%-12%. It’s a 50-50 partnership meaning 50% of the funding is provided by the bank and another half by the P2Binvestor marketplace. Since bank’s funding is cheaper, rates are substantially lower than typical marketplace lending rates.

This program is unique as no one offers such a program. It is particularly beneficial for companies that are growing at a neck-breaking pace. By providing quick funding at bank rates, P2Binvestor is helping to lower the cost of capital for its target market while expediting growth. The lending ratio is 50% to product-oriented companies and 50% to service companies. It typically lends to consumer product companies (mostly new brands), media companies, staffing companies, light manufacturing, and distribution companies. Most of the companies it lends to have consistent payroll and inconsistent payers.

Flexible Lending Practices

Unlike other lenders in the market, the P2Binvestor lending model is fairly flexible. That means the customer can borrow as per their needs and any time they want. Loans are not fixed in nature–for instance, $1 million for three years–rather, they are dependent on the borrower’s invoices. This model does not let the company overstretch, thus ensuring responsible lending.

P2Binvestor has issued loans in excess of $125 million in LOC in the last three years. Its collection rate is quite high (80% collected) and its default rate is under 2% for the entire portfolio. Having its own in-house collection team does help. It garnered $6.5 million in revenues last year and expects to reach $11 million by the end of this year.

Though there are plenty of alternative lenders, there are not many lenders dealing in a ticket size north of $1 million. Having said that, P2Binvestor’s biggest competition is traditional asset-based lenders. Though there are more than a thousand lenders in the space, the firm’s cutting-edge technology and focused customer service gives them an edge over rivals.

A hybrid lender that syndicates 80% of its portfolio off the balance sheet, P2Binvestor is more of a “deal marketplace” where institutional investors can buy into deals in which they are interested. P2Binvestor then uses its own balance sheet to fill funding gaps.

Diversity is the Path to Future Lending

The company will look to enter into further partnerships with banks. Traditionally, banks have not been big on invoice financing, but P2Binvestor believes technology will help banks to get comfortable with this new financing vertical. Its long-term goal is to provide a complete set of lending products to its target market.

The CEO wholeheartedly believes in diversity, and that is the reason why 50% of the company’s workforce is female. It is trying to bring a new wave to the corporate world where women get an equal shot at leadership roles. It is just the beginning, but the company is fully committed to its diversity program.

In a short span of time, P2Binvestor has become a leader in its segment. It has constantly stretched the boundaries with technology, innovation, and culture, and that is the reason it is expected to continue redefining lending norms. With groundwork already laid for future expansion, P2Binvestor will be looking to dominate big-ticket alternative lending.

Author:

Written by Heena Dhir.

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