Given its rapid adoption in consumer finance, it was only a matter of time before buy now, pay later concepts extended into lending to business.
Fintech SME lending models that shift the cost of short-term credit to suppliers of goods to help drive more trade sales, and which replace interest payments with fixed fees, are emerging. It is a dynamic that puts major banks on notice that small business loans could be the next frontier for disruption.
Given large lenders missed the arrival of BNPL in the consumer space and have been relatively slow to innovate business lending products, this emerging fintech sub-sector is set to come into sharper focus next year, according to investors.
Buy now, pay later for business is being marketed as a cashflow management tool and like its consumer cousin, it operates at the intersection of payments and small-scale credit at the point-of-sale.
The focus is funding the business supply chain; the product offers credit-on-demand for particular purchases, contrasting with open-ended loans or lines of credit.
One of the new players in the emerging category is Cloudfloat. It has just raised a $30 million debt facility from the Aura Group and kicked off a fresh $3 million equity raising.
Another player is Marketlend, which has a product known as UnLock that pays suppliers up front and lets buyers pay it back on extended payment terms.
Zip, the second-biggest consumer BNPL player after Afterpay, is also moving in on the space with Zip Business. Meanwhile, another operator, BizPay, is looking to float early next year in a deal Street Talk reported could be worth $400 million.
As well as crossing onto the territory of major banks (Commonwealth Bank invested in invoice funding technology Waddle this year, a response to the dynamic), new players are also moving in on large invoicing financing specialists such as Octet and ScotPac, and offering a different option to term loans offered by the likes of Prospa.
Like consumer BNPL, fee structures differ between providers, but the new model aims to help suppliers offer credit terms directly to buyers, who are assessed by technology to determine if they can repay. The idea is to help SMEs make purchases, strengthening supply chain relationships.
Cloudfloat is targeting the small end of the market: its average invoice is $2000, lower than the other players. It is targeting cafés, restaurants, wholesalers, accountants, and the construction industry, which founder and chief executive Aleem Habibullah describes as “under-serviced markets, where the cost of doing business for the bigger players is just too high”.
Aura’s facility will allow Cloudfloat to lend $350 million given its are loans short-term duration (the average turnover is 42 days). The equity raising is targeting $3 million; existing backers include venture capital firm Right Click Capital.
Like Zip, which is part-funded by merchants and retail customers, Cloudfloat offers different fee models: suppliers may elect to pay the entire fee, or buyers can share the fee, especially when payment terms are extended. The product provides three, fortnightly instalments covering 30 days, up to seven fortnightly instalments over 90 days.
Like Afterpay, businesses cannot roll over loans, and limits are extended with time. Cloudfloat settles immediately with the supplier and takes on the credit risk of the buyer. Buyer credit risk is assessed with data; Cloudfloat uses CreditorWatch ratings and connects to accounting systems, bank accounts and the payment system. Defaults have been very low.
Its fixed fee is 3.5 per cent of the transaction: $70 on an average transaction amount of $2000. The average return is around 5 per cent, because the first instalment is paid upfront.
“Once we get more data and understand more about the customer, we can extend the facility, so we become a float for the business,” said Mr Habibullah, who has formerly worked at National Australia Bank, Westpac and Telstra.
“Unlike consumer BNPL, where you might buy a pair of jeans this week and four weeks later buy something else, we are seeing customers do nearly the same transaction every week, like 100 loaves of bread for the café. We can dynamically extend the limit out as we get to know the business.”
Brett Craig, head of credit funds at Aura Group, said he was attracted to Cloudfloat because it is seeking to create network effects with suppliers and purchasers; within a supply chain, one buyer will supply to another.
“This is B2B BNPL,” Mr Craig said. “Loans are super-short duration and relatively small in size, creating a well-diversified set of exposures.”
He said the model should put big banks on notice that many small businesses don’t require lots of lending; yet banks still assess many businesses on their overall credit needs, and don’t have the technology that lets them service small requirements.
“We want to see the provision of debt funding to Aussie businesses give them ease of access to it when they deserve it,” Mr Craig said. “We don’t want to lend any money to distressed business, but there are lots of businesses that don’t need to borrow $50,000.
“They need $2000, and we want to back businesses that can provide the means to get access to that funding easily and quickly on a shorter timeframe. What is the point of having $50,000 in five-year term debt, when you only need $5,000 to buy stock and turn it over in two months?”