Think back not too many years ago to when thousands of people were becoming online sellers, opening storefronts with online marketplaces and seeking growth capital from their trusted bank — only to leave empty-handed because banks, big and small, smelled risk and uncertainty.
It’s a difficult experience for the person trying to finance their online store, but great news for FinTechs doing a brisk business getting capital and credit to legions of online sellers.
That’s the story now, as Payability co-founder and CEO Keith Smith told PYMNTS. The company’s lending and credit solutions are tailored for online sellers, which means understanding the difficulties of underwriting small businesses that lack the metrics that make borrowing easier.
“Five years ago, if you were an eCommerce seller, it was very, very difficult to be able to get financing,” Smith said. “You’re an online only business. That means banks and traditional finance companies aren’t going to be able to finance you, or even figure out how to be able to risk assess you.”
Add pandemic disruptions that rocked even global conglomerates’ access to capital, and the shock to marketplace entrepreneurs was far greater. It also created an opening for others.
“It’s difficult to find your footing at this point in time and figure out what is a normal [or] typical cycle, what is seasonality going to be for particular products this year, and not being able to necessarily compare to prior seasonality from the last couple of years,” Smith said. “It’s a bit of a challenge for us, and certainly challenging for our customers.”
With challenge comes opportunity, and Payability is one of the FinTechs helping small sellers grow big enough to even become acquisition targets, which is the golden ticket for many.
See also: Amazon’s Share of US eCommerce Sales Hits All-Time High of 56.7% in 2021
Growth During Wartime
Pressure on lenders to modernize for eCommerce sellers was building for years before COVID-19 came, but a global health crisis forced the issue, bringing new options into view. Now, Russia’s invasion of Ukraine and runaway inflation are reigniting urgency.
“We knew we were coming into a credit-tightening kind of environment” Smith said. “We knew that it was probably going to be more of a risk-off environment coming into 2022. The Fed was already signaling that they were going to be tightening, we knew inflation pressures were there, we knew that there were supply chain issues.”
As challenging as those situations are, those conditions are actually favorable for a small business lender using its own approach to risk to create financing products for the unique needs of small merchants.
Smith said a typical customer sells on a platform like Amazon, Shopify or Walmart. In each case, they’re experiencing a cash crunch as they wait to get paid. Payability’s solutions aim to even out that cash flow — offering instant payment options, as well as instant advances of up to $250,000.
“It becomes a healthy way to be able to run your business,” he said, “not only to make sure that you’re accelerating the way that you’re getting paid from platforms, but also making sure that you have capital in reserve for when an opportunity arises that you can tap into immediately. There’s no additional credit review or anything like that at all.”
Read more: After Shopify Loses 60%+ of Its Worth Since November, Investors Suddenly See Value
The Right Underwriting
While there’s more confidence that the pandemic is moving to its endemic phase on the threshold of the second quarter, ongoing supply chain issues, inflation and gas prices are making specialized lenders far more valuable to small sellers with inventory, marketing and logistics needs.
Smith said Payability is getting more inquiries from sellers, with a mix of existing and prospective customers that have seen shipping and fulfillment costs triple over the past couple of months.
“They’re having to figure out, ‘Do I pass those costs along and as a result end up selling less, or do I try to [make] a smaller profit margin and be able to continue to sell the same volume that I was selling before?’” Smith said.
It’s a frying-pan-or-fire decision for many marketplace sellers. Traditional credit scores and sales histories may not cut it for underwriting, and that calls for innovation.
“Our approach is to say, ‘Let’s look at the history of the experience this seller has had with the platforms they are selling through,’ and create a score around that, rather than trying to look at the individual’s credit score and try to figure out from that whether or not we should provide them with capital,” Smith said. “We already start from a very different place.”
That’s big news for small sellers without the business bona fides for a bank loan. Combined with a personalized touch, Payability is also succeeding due to a grounded mindset.
“We recognize that we’re people. We’re entrepreneurs serving entrepreneurs. All the tech in the world doesn’t change the fact that we need to be human,” Smith said. “Making sure that we are providing that human touch matters a ton at these times.”
Related: Walmart Lets International Merchants Sell On Its Marketplace
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