Thursday, September 25, 2014

Fundbox: An Alternative To Invoice Factoring or Discounting

When you visit the homepage of Fundbox, you don’t see the words invoice factoring or short-term business loans. Instead, the headline reads:

Overcome Cash-Flow Gaps. Get Paid Instantly.

One of the first things that Eyal Shinar, the CEO of Fundbox, said to me during a recent interview was “businesses don’t like invoice factoring.” While invoice factoring comes in many different varieties, a common variant includes a company selling their invoices to a factoring company in exchange for a certain amount of cash upfront. The factoring company then proceeds to collect the money from the company’s customers listed on the invoices.

Many businesses don’t like a third party having a direct relationship with their customers. The actions of the factoring company, which is “eager” to collect money, could affect their relationship with the client.

However, factoring serves a very important function. It enables companies to overcome short-term gaps in their cash flow. While expenses can be consistent or need to be paid in advance for a big job, payment for work can often arrive 30, 60, or 90 days after work is done. Eyal cited research which estimates you should have about two months of “normal” operating expenses on hand to function smoothly.

While traditional factoring may cause customer relationship problems, the traditional lenders (banks) typically don’t want to lend small amounts for short-periods of time to small businesses. When they do, through a traditional working capital loan, they typically charge a business for the right to borrow money, regardless of whether they actually borrow money.

Fundbox is a solution to the the problem of short-term working capital. What is Fundbox?

1) Fundbox offers 12 week loans to small businesses. (The CEO would call it a cash advance.)
2) Payment for these loans (including principal, interest, and fees) is deducted from a company’s bank account in 12 equal amounts on a weekly basis.
3) There is no penalty for early payment. In fact, the interest rate on the loan is reduced if the loan is paid early.

Point 3 is very important. There are a number of companies that charge calculated interest on short-term small business loans. In other words, the business is responsible for paying interest for the entire term of the loan, regardless of when it’s paid off. With Fundbox, the borrower only pays interest for the time that the money is actually borrowed. For example, if a company has a big invoice coming due in 4 weeks, and pays off Fundbox when the invoice comes in, the company has effectively taken a 4 week loan.

There are two other ways in which Fundbox loans are connected with invoices:

1) The amount of the loans are tied to specific invoices which are scheduled for payment in the near future. When a company uses FundBox, they pick specific invoices to get up front payments from Fundbox. The loan is effectively matched with future receivables, which should prevent the re-payment of the loan from creating a new cash flow issue for the borrower.
2) The interest rate of the loan is tied not only to the creditworthiness of the borrower, but to a lesser degree the company which received the invoice. On one level this doesn’t make sense, as the borrower must pay Fundbox back regardless of if the invoice is paid. However, this practice encourages companies to borrow money with invoices that they have a degree of confidence will be paid. If the invoice gets paid, the company will have the cash on hand to pay Fundbox back.
I should point out that the CEO of Fundbox strongly took issue with my description of the company’s product as a short-term business loan. It’s very, very different from everything else out there in the small business loan space.

There were a few questions that I was eager to ask Eyal about Fundbox.

What is the typical interest rate?

Borrowers pay between 0.7% and 3.0% of the loan amount in interest per month, however, the typical borrower would be closer to 2.0% (Editor’s note: The Fundbox site has a calculator which allows one to see the approximate amount that would be paid. On a $5,000 loan paid back over the full 12 weeks, the borrower would pay back a total of between $5,243 and $5,343

Can any business be approved for using Fundbox?

Around 40% of businesses that apply are accepted. However, this number includes both fraudulent applications and those that don’t meet the financial criteria. Typically, we approve companies to get advances on up to $10,000 invoices at a time, however, this varies from company to company.

Does Fundbox report to the credit reporting agencies?

Not at this time.

Eyal is an expert in financial services and technology management. As a Vice President in Battery Ventures, Eyal led many projects and investments in the areas of finance, machine learning, SMBs and SaaS. Notable examples are IDI Direct Insurance, Istra Research (algorithmic trading), Cortera (online risk solutions for credit professionals), cVidya (revenue assurance and fraud prevention), Leadspace (semantic prospecting) Champions Oncology (big data analysis), Sportority (FTBpro) and others. Prior to his work at Battery Ventures, Eyal was one of the first employees of Old Lane, a $5.5B NY-based global hedge fund (later acquired by Citigroup) where he focused on complex options structuring and risk and financial engineering, and has also worked for Castle Harlan, a leading $6B NYC-based buyout firm. He attended the top percentile program for outstanding students at the Hebrew University (LLB) and later was the recipient of the prestigious Orion Scholarship in Exact Sciences. Eyal earned his MBA at The Wharton School of Business at the University of Pennsylvania.

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