How Stripe and Other Fintechs Threaten Bankers By Offering Cash Advances

Online financial services firms are expanding horizontally into small business lending. They can do it faster and cheaper than banks, credit card companies - or venture capitalists, making them a more direct threat to traditional lenders than ever before. JL

Ingrid Lunden reports in Tech Crunch:

New cash advance services provide financing to business customers 1-2 days after applying for them. Business loans compete against the rest of the payments and financial services pack, including other tech-first companies like Square and PayPal, established payment and credit firms like American Express, and traditional banks. “VC capital is by far the most expensive way to access capital as a company, more expensive than credit card debt.”
Stripe, the fast-growing payments startup that is now worth over $9 billion, is working on a new product to help it fill out some of the gaps in its product suite as it bids to become the go-to financial services partner to startups and other businesses. It has been testing a new cash advance service, providing financing to its business customers, that would provide funds to businesses 1-2 days after applying for them.
Stripe has already started to reach out proactively to customers to market and issue the loans, which appear to be getting tested under the brand name Advance.
One of those businesses provided us with details of what Stripe is proposing: the business was offered a $25,000 advance by Stripe, with a 10 percent premium (in other words, a loan for $25,000 will total $2,500 plus the $25,000 loan amount). Users are given a fixed percentage rate, taken from daily sales, to pay back the Advance —
meaning the minimum amount you pay back can vary by the day based on your sales for that day. In the case of our tipster, that payback rate was three percent of his daily sales.
Asked about the cash advance service, Stripe acknowledged that it was testing something out and pointed us to this tweet without elaborating more. So we don’t know if Stripe has been offering other users different premiums or payback percentages, nor if $25,000 is the cap or if it’s loaning more, nor if it’s working with a third-party to provide the financing, or whether it is offering it off its own balance sheet.
As a point of comparison, today Square works with Celtic Bank to provide loans through Square Capital, and the loans come the next day and range from $500 to $100,000, with what appears to be variable premiums; like Stripe, customers are given an option to pay back by way of a fixed percentage of daily sales.
Amex offered the same customer approached by Stripe the ability to take a loan of $250,000 with a lower overall cost for the money, four percent. PayPal provides loans of up to 30% of your annual sales “in minutes” after approval.
For those reasons, we think that when (if) Stripe fully launches its Advance product, you might see different numbers based on this feed back and what’s already out in the market.
Building a cash-advance service makes sense for a number of reasons.
For one, it will help Stripe diversify its business as it continues to grow. Payments — the core of Stripe’s business — generally make a thin margin and require economies of scale. Financing works on a different principle, potentially giving the company a way of making an instant return on money that it already has.
And there is a demonstrably large appetite for business loans. Square Capital has loaned out more than $3.1 billion to businesses since May 2014. Meanwhile, it’s also looking at how it might further expand financing activities. Square Installments, which is currently in a pilot, lets Square merchants offer their customers the option to pay over a period of several months by way of invoiced installments.
The basic Square Capital business is also growing: the company said that in its most recent quarter, Square Capital facilitated over 60,000 business loans totaling $390 million, up 22 percent year over year.
Issuing business loans, in that regard, also would help Stripe compete better against the rest of the payments and financial services pack, including other tech-first companies like Square and PayPal, more established payment and credit firms like American Express, and of course traditional banks.
Stripe has already been expanding into other business services, such as helping companies incorporate in Delaware, and better manage fraud on transactions. Financing fits in with those: like the fraud product, it’s another example of how Stripe can build products based around data that it is already picking up about its business customers and their transaction histories.
You can also see Advance (or whatever it might be called) as a way for Stripe to better hold on to customers.
Our tipster said that he was actually considering leaving Stripe because getting full records of his company’s accounts on Stripe, to arrange financing through out companies, has been too difficult. This financing service doesn’t solve that problem — but it would give customers who are otherwise happy with Stripe an alternative rather than becoming a deal-breaker.
Indeed, you could also argue that not offering a financing product puts Stripe somewhat behind the game and missing out on a key financial service for smaller and younger enterprises, a service that others have been offering for years now. SMBs typically take loans to smooth out cash flow, invest in a part of their businesses as they are growing, or to make up for an unexpected cost in a given period.
Some prefer to take out financing instead of working with VCs. “The thing a lot of startup founders don’t realize is the cost of VC capital,” our source said. “VC capital is by far the most expensive way to access capital as a company, more expensive than credit card debt.”