Receivables financing is a $186 billion a year industry that has seen very little innovation. That is about to change. Just as Lending Club and Prosper have disrupted unsecured consumer loans P2Binvestor (P2Bi for short) aims to do the same in the receivables financing market. I sat down last week with the co-founders, Bruce and Krista Morgan (a father and daughter team) to find out how they intend to do that.
Don’t Call it Factoring
When people think of receivables financing they often think of factoring which can be the preferred financing method for desperate companies. It can be very expensive with APRs sometimes running into the triple digits. This is not what P2Bi is doing. The rates they charge are in the 18-25% APR range and they only work with growing companies – clients must have experienced three consecutive quarters of growth to be considered by P2Bi.
What P2Bi is doing in reality is providing a line of credit to businesses backed by receivables. Let’s provide an example to show how it works.
ABC Company sells widgets and has $100,000 in monthly sales, all on 30-day credit terms. They would like to borrow $80,000 to buy some new equipment. They cannot get a bank loan so the owner goes looking for alternatives. He discovers P2Bi and decides to sell his receivables to them. They sign a 12-month contract with P2Bi for them to manage $100,000 worth of receivables.
P2Bi analyzes his receivables and believes they are a good credit risk and so advances ABC Company $80,000 immediately of the $100,000 in receivables they purchase. ABC Company is able to go and purchase their new piece of equipment. As all the payments come in to P2Bi on the receivables of ABC Company another $18,000 is sent and P2Bi retains $2,000. [Read more…]