In August, Lending Club filed to go public. It’s what is commonly known as a “peer-to-peer” lending marketplace. I read the prospectus with fascination, but did not write about it for two reasons:
- “Peer-to-peer” means consumer to consumer (C2C) and I try to stick to B2B. (To be fair, Lending Club does a little business lending and accredited/institutional investors are involved.)
- Personal loans and consumer debt do not get my blood pumping
Then on Tuesday, OnDeck Capital filed to go public. OnDeck offers term loans and lines of credit to small businesses. On Deck is squarely b2B, meaning small business loans financed by debt (or equity) issued by OnDeck or loans bought by investors. Now I have to write about the area!
Though OnDeck and Lending Club have different target markets and challenges, they combine elements of several of the nine value propositions of B2B platforms I have written about previously:
- Matchmaking: These marketplaces attempt to match under-served people or companies needing loans with new, lower-cost, often non-bank sources of financing
- Supply chain automation: These companies seek to automate and simplify the process of obtaining a loan, buying a loan, and servicing a loan through automation of each of these interfaces
- Industry big data: They use algorithms to (hopefully) more accurately assess risk, (especially since they are playing in a risky parts of the market)
- Transaction financing: While they do not technically lend against specific payables/receivables (yet), they are all about financing
You could even think of them as crowd-funding sites, but the investment is in the debt of a person or small business, rather than a specific project.
All of these companies face the risk of:
- a crazy patchwork of state-level regulations and regulators who are wary of the APRs they offer (OnDeck’s average APR is near 50%)
- figuring out how to acquire good risks at affordable prices and avoid fraud
- unknown brand names in a world with 28 million small businesses all scared that this is some sort of scam
- volatile financial markets
These marketplaces seek to dis-intermediate banks, use better risk algorithms to reach directly into new investor classes (after all, the ratings agencies did not cover themselves in glory during the financial crisis), and, in effect, create a new asset class. They want to achieve these goals without investing in branches and associated overhead.
It’s hard not to compare and contrast their goals with those of the supply chain finance providers. At this point, the differences are:
- Most supply chain finance funding comes from the balance sheet of the client themselves (in the case of dynamic discounting) or from the banks in the case of “true” third-party supply chain finance
- In supply chain finance, risk is reduced, not through algorithms, but through the use of approved invoices and contractual guarantees to pay by investment grade borrowers. It is a much lower risk, much higher volume business
- As a result, supply chain finance today involves a more complicated legal structure and a different asset class altogether
- Supply chain finance is mainly B2B–big company to big supplier, and is just now getting to B2b, big company to small supplier
But supply chain finance is striving to shed many of these “differences” and achieve many of the objectives OnDeck and others are starting to achieve in terms of developing a new, non-bank investor pool and asset class. And eventually, everyone in supply chain finance wants to get to PO and other forms of financing that may be more algorithm and less contractually based.
To the extent that supply chain finance starts to cater to small businesses and the investor pool becomes familiar with their assets, we may start to see these players who are making the headlines working with the hitherto “obscure” B2B supply chain finance players.