The problem with finance isn’t that 80% of finance experts can’t beat the market, it’s that we make everything so inaccessible to the average layperson. You cannot convince the general population to hand over their hard earned money for you to manage unless you can convince them that you have some information advantage over them. The way financial managers used to do this is by using lots of cryptic terminology so people are discouraged from trying to understand something that’s inherently simple. Words like these make most people start to tune out immediately, including us:
In today’s world of millennial investors, you cannot use harsh words like those. You need to explain these complex financial topics using more friendly and accessible words because today’s youth are too
lazy busy to learn themselves. According to a recent article in the Financial Times, online broker Robinhood which caters to millennials found that their customer base had a difficult time understanding how interest rates work so they moved to a fixed monthly fee for margin loans (rolls eyes). If you have a tough time figuring out an interest rate, the last thing you should be doing is trading on margin.
The key takeaway here is that fintech companies can now create business models around repackaging financial products that have been around for a long time and make them more accessible to millennials – in other words, dumbing them down. One such company we came across is Fundbox which offers a small business loan product which is often referred to as “factoring”.
Factoring for Millennials
Founded in 2012, San Francisco startup Fundbox has taken in $107.5 million in funding from a whole slew of investors including Jeff Bezos and Khosla Ventures. In its most basic form, Fundbox gives small businesses access to credit in just minutes. In the big bad real world out there, this is something finance people refer to as “factoring” and it’s been offered as a financial product for quite a while now. The concept is actually quite simple.
Lets pretend you have a business selling beard wax to retail outlets. One of your salespeople just managed to sell a crate of beard wax to Levi’s for a special “beard wax and skinny jeans combo” they’re offering. Now let’s say you sold that crate of beard wax for $2300 and you sent the invoice to Levi’s with
Net 30 Payment Terms a note that asks them to pay you within 30 days or else your feelings will be hurt. While you’re waiting for Levi’s to pay, you need money to buy more inventory from your wax supplier. This is where Fundbox comes in. They know that Levi’s isn’t going anywhere and there is a 99% likelihood they’ll pay their invoice. Fundbox then pays you the $2200 and waits for the invoice to arrive at which time they will receive $2300. That’s how factoring works.
So the most important question you should be asking right now is how much you’re going to be charged for this “factoring” product? Fundbox has an online calculator which shows you what “weekly payments” you can expect to have:
Here we see another case where the interest rate is obfuscated by some mention of a weekly payment. However, we showed the above numbers to one of our MBAs and she said this works out to a yearly interest rate of about 4.7% which is simply excellent. This also implies that they’re going to be a bit particular about who they loan money to, something we found out after applying ourselves. You can see how this is quite different from just a normal small business loan because the risk here is quite low. Over 50,000 small businesses have used Fundbox, and you can literally receive money the following business day in three easy steps:
If you’re like us and you operate a business that just doesn’t have lots of accounts receivable action going on, then you might like our next company which specializes in giving out unsecured business loans to small businesses with zero credit. The business model has been so successful so far that they’ve actually achieved mythical unicorn status (they’re valued at more than a billion dollars in other words).
Small Business Loans Quickly with No Credit
Your business credit score is a whole lot different from your consumer credit score in quite a few ways. The most notable way is that when you create a new business, you don’t have any established credit. While some banks take a peek at your personal credit score and use that for guidance, the truth is that the day you started your business, you had no credit. This makes it very difficult for some businesses that just need short-term loans to help them run their operations more efficiently.
That’s where Kabbage comes in. Founded in 2009, Atlanta startup Kabbage has taken in a whopping $238 million in funding so far from investors that include the biggest technology fund there is today, Softbank. In addition to all that funding, Kabbage also closed a $500 million line of credit in March of this year. Like Fundbox, Kabbage wants to know everything there is to know about your business by looking at your bank account. After it whirls through all your transactions, it then starts asking questions about other services you might use:
If you’re hesitant about providing all this information, just remember that it’s being used to determine an instant credit score. The actual time they spent processing our application was literally 3 minutes before we qualified for a $50,000 loan. From the time we landed on their homepage to the point at which we were adding our bank account details to receive a $50,000 loan was under 10 minutes people. That’s incredible. Of course all the speed comes with a price. We were given payment options of 6 months and 12 months. Here’s the 12 months option:
We’d probably just let our MBAs starve to death before paying a 33% interest rate, but even with those fees over 100,000 businesses have availed Kabbage’s services to borrow over $3 billion. You know how people say things like “oh that’s okay, I’ll just charge it on the business account“? That’s the same sort of attitude that lets people feel just fine with fees like this. Plus, let’s face it. With the failure rate of small businesses, Kabbage is just doing proper CYA (look it up) to make sure that they can operate a profitable business in a high-risk lending space.
The other interesting thing to note is that Kabbage caters to online retail businesses who may need money up front in order to purchase inventory. They allow you to connect your Etsy, eBay, or Shopify account so that they can actually see the details of your business and then establish some sort of confidence in offering you a small business loan.
There are no doubt loads of companies out there that are pursuing some aspect of loaning money to small businesses. Not only do they collect
interest monthly payments from the money they loan out, but more importantly, they get immediate insight into every financial detail of the businesses that sign up. While you may want to check those privacy clauses to see how this data can be used, they’ll most likely keep it in house and use it to sell you products from their affiliate partners because those AI algorithms they’ll inevitably start using will know exactly what you need, when you need it.
You don’t have to live with your parents and blog about travel/fashion for a living to use these products. Pretty much any small business can quickly use either Kabbage or Fundbox to increase the availability of cash on their books. We were pre-approved for $50,000 loan from Kabbage and we have zero prior credit history for our business. You can see how much they’re willing to loan you in about 10 minutes by opening a free account.