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SMB Financing is a window of opportunity ‘big enough to drive a truck through’
The last market opportunity “big enough to drive a truck through” that I witnessed was the difference between time spent online and ad $ spent online.
SMB Financing is in that class now because of four mega trends:
- Banks are lending less (due to balance sheet constraints) just when business is recovering and needing new capital to grow.
- Large business continues to shed workers (forcing many to create or work for small business).
- Networks and platforms lead to frictionless commerce that makes it easier for small firms to compete. In other words, small business is getting bigger.
- The rise of the Rest where most people are self-employed.
Most Banks don’t even have an organization dedicated to SMB Financing. They nibble at the edges of this massive opportunity by:
- Letting Corporate Banking sell to the M in SMB as if they were a smaller version of a Corporate.
- Letting Consumer Banking sell home equity lines that business owners use to finance their business.
The startups that are “laughing all the way to the IPO” like Lending Club and Ondeck figured out that you don’t need any ground-breaking innovation. All you need is “better, faster, cheaper” credit evaluation using digital data.
Small business credit evaluation is complex and very expensive if done manually with paper and human bankers.
SMB is one of the biggest categories in the Fintech 1,000 Innovator Catalyst Database.
I have already reviewed the following SMB Financing ventures:
The last two are interesting. Iwoca go after the really, really small businesses, what might be called Micro Business. Zidisha is doing the same in the developing world. In America which is a developed country with an almost brutally efficient economy, nearly 40% of workers will soon be self-employed by 2020. In the developing world, that % is far higher.
So the market is really MSMB – Micro Small Medium Business.
I created 6 Sub Categories in Fintech 1,000 within MSMB:
- Efficient loan processing through analytics. This where the big money is today with the companies I have already reviewed including two that are IPO scale unicorns – LendingClub and OnDeck. This has got so big that it could have a sub prime type blow up.
- Digital trade finance. This has lots of ventures some them quite mature, but is not as high profile as the first segment. These go via various names such as Supply Chain Finance, Payables Finance, Receivables Finance. These offer lower APR for companies that have invoices from customers who pay reliably (or have a good credit rating). Ventures include:
- Asset based lending. This is not as mature and still ripe for innovation. True Accord could fix the currently messy business of asset recovery post default and this could bring efficiency to asset based lending.
- Innovation Capital aka equity for Baby Unicorns or Unicorn Food (aka Flips). This is the world of VC and Angels and Angel List is the disruptive player, but other interesting plays are around secondary markets and private deal rooms such as GUST.
- Patient Capital for Butchers, Bakers & Candlestick Makers. It is hard to do equity funding for main street businesses, because is no exit, but it maybe that this simply requires innovation around portfolio construction and payout via Dividends. Crowdfunding networks, such as Seedrs, may morph into this space as the Innovation Capital space gets increasingly crowded during this stage of the macro cycle. Dealstruck offers long term loans that are an alternative to equity.
- SMB services for finance (payroll, tax, AP, AR etc). Selling SAAS to small biz is tough – the CAC/LTV metrics can kill you. So we may see more Freemium in return for owning the data with an upsell to financing.
Hey SMB CFO Who You Gonna Call?
Who is on the CFO Speed Dial?
It is Friday evening and the CFO and CEO are having dinner. They plan a major initiative but the financing is not in place. They know all the above types of services. Who can help them pull it all together and deliver the best APR in quick time?
It could be the next Fintech Unicorn. Or a Challenger Bank. Or a Big Bank thinking outside the box. SMB Financing is a massive market and we are still in the first innings of this game.
