One of the biggest challenges for small businesses is accessing capital.
Weeks can pass before sales result in payment — especially for online merchants.
But what if there was a way to access that money as soon as you make the sale?
That’s exactly what Keith Smith, Co-Founder & CEO at Payability, is bringing to small businesses, allowing them to unlock that capital and use it when they need it.
In this episode, we discuss how Payability addresses:
- The capital concerns for small businesses
- The hard-hit sector of online-only business
- How to provide capital for entrepreneurs with weak credit
Small businesses and their capital punishment
Keith founded Payability to solve a problem.
Small businesses — especially those operating in digital marketplaces — are often restrained by their limited access to capital.
It’s not that these businesses aren’t good at what they do, it’s just the nature of the business.
“You buy your inventory. You sell your inventory. Then you wait four weeks to get paid. It makes for a very lumpy growth trajectory. So, we provide daily working capital based on yesterday’s sales.” — Keith Smith
As alluded to in the opening of this blog, those selling goods through these marketplaces have the cash, it’s just inaccessible as capital most of the time.
The constant movement of buying inventory, waiting weeks — even months in some cases — for payment and then using that payment to buy more inventory makes for an unpredictable cycle that ties up the money in the business.
In its simplest form, Payability allows these businesses to access daily capital based on the previous day’s sales — up to 80% of them — whenever they need it.
This results in highly predictable — i.e. not lumpy — access to the pending funds from transactions they’ve already made.
More importantly, it gives these businesses a chance to grow.
Online-only business and traditional finance
Now, if this seems pretty simple, you may be overlooking the other problem this sales-based capital is solving.
For most of these vendors, being online-only businesses effectively cuts them off from traditional lenders.
“Online-only business is something that has scared banks and traditional finance companies for years.” — Keith Smith
The issue is that most traditional banks are accustomed to working with similarly traditional brick-and-mortar retailers.
These retailers may be waiting even longer for payment than their digital counterparts, but they also have something lacking in much of the online world:
Specifically, receivables from big-box, extremely-credit-worthy stores. From the bank’s perspective, this is as good as cash.
But online retailers in the e-commerce world operate with a different dynamic.
They don’t get a receivable from Amazon, Shopify, or Wal-Mart — they have an earnings report on a dashboard.
For Payability, this was the opportunity to serve this market.
The company has managed to break the reports that these marketplaces generate into effective indicators of financial risk.
The risk assessment process is something the traditional banks never invested enough in to fully crack. But now that Payability has shown it can be done, traditional finance is seeing the benefits and backing Payability.
It’s a win-win.
Payability has 3 main integrations working together to pull this off:
1. The customer onboarding process
The company needs to ensure the customer is able to go to Payability, connect to the API for their marketplace, and provide the data needed to assess risk.
2. Comprehensive transaction data
With this information, Payability can look at the quality of these transactions, the products being sold, the fulfillment process, and delivery time. If any red flags pop up, they can adjust for the increased risk.
3. The robots
Well, OK… they’re not robots, per se. But the company does use machine learning algorithms to properly assess their risk exposure. There is simply too much data they are looking at to be properly assessed by mere humans.
With this comprehensive approach, Payability can properly price the financing they offer their customers.
Entrepreneurs and credit
Payability’s thoroughness also solves other problems that, more often than not, go overlooked when it comes to small businesses.
A problem many entrepreneurs face:
“Some of the most committed and dedicated entrepreneurs have terrible personal credit.” — Keith Smith
It may seem counterintuitive to say that many of the most reliable entrepreneurs suffer from bad credit, but it makes sense when you think about it.
Dedicated entrepreneurs are really, well, dedicated… to their business.
And if you spend all your time focusing on growing your business, anything outside of it may fall through the cracks. It’s hardly surprising that an entrepreneur may forget a personal bill now and then.
But when it comes to accessing capital, many traditional lenders are looking at the entrepreneur’s personal credit.
Payability’s approach to risk assessment bypasses personal credit.
Keith has found that the indicators they are getting from the market are much better for assessing risk than a credit card bill the founder forgot to pay a few months ago.
The most important data comes from the marketplace.
And by accessing it, Payability is helping online businesses break free from their capital constraints and grow their business effectively and predictably.
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Until next time!