Fintech Lender Affirm Leans on Investors to Fund Rapid Growth

“Buy now, pay later” has also been a focus of recent deal activity. Payments company

PayPal Holdings Inc.

this month said it would purchase Japanese startup Paidy Inc. for $2.7 billion, following an agreement last month by Square Inc. to acquire Australia’s

Afterpay Ltd.

for $29 billion.

San Francisco-based Affirm offers short-term loans to customers at the point of sale—for example when checking out online—with payment terms ranging from three months to five years. The company, which went public in January, offers its “buy now, pay later” loans through partnerships with companies such as

Walmart Inc.,

Amazon.com Inc. and

Peloton Interactive Inc.

Gross merchandise volume, which measures all retail transactions on Affirm’s platform net of refunds, was $2.5 billion during the quarter ended June 30, about double the amount from a year earlier.

One of the ways Affirm funds its business is through securitizations, which is similar to what other fintech lenders such as

SoFi Technologies Inc.

and

Upstart Holdings Inc.

are doing. The company entered the securitization market in July 2020 and has completed six transactions since then. Affirm during the quarter ended June 30 funded about a third of its $4.7 billion buy-now-pay-later loan portfolio with cash from securitization deals, in which the company packages its loans together into securities and sells them to investors.

The company previously relied on warehouse funding from lenders, in which the company borrows against its consumer loan balances, and direct loan sales to other companies. Securitization deals require less equity capital than warehouse financing, which the company is moving away from, Chief Financial Officer

Michael Linford

said. Such financing accounted for 19% of the company’s funding mix as of June 30, down from 42% a year earlier.

Affirm generates most of its funding by selling the loans that it doesn’t slice up into securities. Direct loan sales to other companies accounted for 49% of the company’s funding mix during the period ended June 30, bringing in $2.3 billion, or nearly double the amount from a year earlier.

“We aspire to a substantially higher level of scale in our business,” Mr. Linford said, adding that the company needs a diverse set of funding sources as it expands so that it isn’t overly reliant on one.

Affirm’s business model is more complex than that of many Main Street banks, which use deposits on their balance sheets to fund loans. Affirm relies on two banks—Cross River Bank in Fort Lee, N.J., and Celtic Bank in Salt Lake City—to originate most of its loans. It then buys the loans from its bank partners and services them throughout the life of the loan.

The company, like other fintech lenders, includes some of its securitization trusts on its books and moves others off its balance sheet. During the most recent quarter, Affirm sold the riskiest piece of one of its deals to third-party investors. Doing so allowed the company to move the loans off its balance sheet and record a $16.7 million gain on the sale.

The company during its latest quarter brought in $42.6 million from gains on loan sales—both whole-loan sales and off-balance sheet securitizations—up from $11.6 million a year earlier. It reported a net loss of $128.2 million for the quarter, compared with a profit of $34.8 million in the year-earlier period.

Expanding into securitizations has diversified Affirm’s funding mix, analysts said. Still, such capital streams can dry up if investors get skittish or economic conditions deteriorate, said

Vincent Caintic,

managing director at financial services firm Stephens Inc. “It’s not sustainable over the long term,” he said.

Affirm views its warehouse lines of credit as a backstop if it can’t access the securitization market, according to Mr. Linford. The company has no plans to take on additional corporate debt to fund the business, he said.

Investor demand so far for Affirm’s securitizations has been strong, said

Imran Ansari,

a senior vice president at DBRS Morningstar, adding that the company’s funding model provides it with other options should that change. “If any one funnel shuts off, they have another outlet,” Mr. Ansari said.

Write to Kristin Broughton at Kristin.Broughton@wsj.com