Please welcome one more precious interview in MonJa’s new project: Small Business Lending Interview Series. For those who are new, during these interviews with industry leaders, we cover their stories of success, challenges, and secrets of their competitive advantages in small business lending arena, as well as their perspectives on the online lending industry overall. This time we are welcoming our guest: Krista Morgan, CEO and Co-Founder of P2Binvestor.
About the company: P2Binvestor is a next-generation financing company for next-generation businesses. P2Binvestor partners with crowd investors and community banks to offer quickly growing companies flexible, affordable capital, leveraging our platform to create a seamless, secure, and swift online financing experience. With unique loan structure, P2Binvestor offers lower borrowing rates compared to other alternative lending options.
Its innovative lending solution offers businesses that are hungry for growth $250K to $10M+ in lines of credit that grow when you do.
James Wu: Welcome to the podcast, Krista.
Krista Morgan: Thanks for having me.
James: Okay, terrific. So let’s just get started…it would be great if you can start by giving the listeners some background about P2Bi.
Krista: Sure, P2Bi is a financial tech company, a marketplace lender that provides million dollar lines of credit that are typically backed by receivables and inventory to growing businesses that can’t access bank financing.
James: That’s very interesting and, you know, you recede on receivable financing which is a little bit unique compared to many of the online lenders that focus on the business segment. Tell us a little bit about how you came across this market.
Krista: When we were first getting started, we were just going to do invoice financing and we thought we’d be doing $50,000 deals. As we started to get in the market, we kept running into businesses that had outgrown their current lender. You know, they got a small business loan, but now they needed $1 Million, they needed $2 Million and they’re being served by…..there were no online lenders at that time and that excitement; it was all traditional alternative lenders. They don’t have good technology, the user experience changed… Contracts were really hard to understand, the phrasing; it’s expensive… You know, that was where we thought our market is so that’s what we ended up targeting.
James, Yes, and that’s definitely a big differentiator compared to some online lenders. For your borrowers, how do you think your solutions differ from banks, how is the overall experience, and the funding?
Krista: In a line of credit that’s backed by receivables it’s actually very cumbersome to manage, for both the borrower and the lender. You’re constantly having to upload the collateral, having new borrowing base calculated and it’s just a hassle. A huge thing that we worked on is creating a really great user experience to make the management of a line like this a lot easier, and it’s for both the borrowers, but also for us internally.
We were able to service these lines of credit much more cost effectively than a bank or another different alternative lender.
James: So it sounds like this is definitely a more efficient approach, especially for businesses that have receivables. Can you talk a little bit about what types of businesses will be your typical borrower?
Krista: There are two main verticals that we see. One is any kind of consumer packaged goods; we have a lot of natural food clients, we have pet people making high-end pet products; electronics, really anyone who is selling its products to a bank retailer or distributor. The types of lines we offer are like perfect for that type of company.
On the other hand, we have professional services companies, staffing agencies, media agencies, marketing firms, anyone with a consistent payroll and inconsistent payments.
James: That’s pretty cool. I imagine during the early days, you had to work pretty hard to find these borrowers.
Krista: We still have to work hard (laughs), that is not going to be easier. I would say that’s something we’ve spent a lot of time trying to figure out.
James: Yes, I can definitely imagine. Yeah, you mentioned health foods and that makes perfect sense. You’re in Denver and everyone is super healthy and very into lifestyle so it fits. Can you tell me the most interesting business that you’ve funded, some business that’s a little bit unique and unexpected.
Krista: Sure, we have a company that’s based in California and they make this really cool, tiny printer where you can like trunk in like an Instagram photo and then when you take your phone and hover over the photo, it like comes to life and shows a video behind it.
Krista: I know, it’s really cool. They came to us pretty early on. They did a Kickstarter campaign and then they got picked up by Apple exclusively and they’ve grown significantly over the past couple of years. Their product just took off, they’re one of my favorite clients, just a great team, a great product and the perfect case study for what we’re doing which is ….you know, we really specialize in those high growth companies.
They need $1 Million today, but they’re going to need $2 Million in 6 to 12 months and we are able to scale with them due to our marketplace scale.
James: Yes, that must be so satisfying and being part of the process where your financing is really helping the businesses grow and really creating innovation and creating jobs. That’s awesome!
Krista: It is a great part of my job when I get to spend time with the entrepreneurs that we work with, I never get tired of that
James: That’s great. Maybe switching gears a little bit, let’s talk about the funding side. So do you work with investors who buy loans and have their roles evolved over time?
Krista: Yeah, so we’re what you call a hybrid marketplace balance sheet lender and the difficult thing we face on the funding side is that we’re providing a revolving line of credit where the balance is going up and down really every day on every client. And so we don’t always need the capital we had out yesterday may not be the same capital we’re going to have out today. And so that fluctuation took us a while to figure out how we were going to fund that in a marketplace model.
So what we have is a marketplace with accredited and institutional investors who are buying typically about 80% of our portfolio is syndicated to the marketplace and then we use our balance sheet. Basically the balance sheet is our shock absorber, that’s what we call it, our shock absorber line to fill the gap so if a client goes to needing $500K one day and $700K the next day, that gap can quickly be funded off our balance sheet while we then syndicate it out to the marketplace.
In 2017, we launched our bank partner program so we also now have bank partners in the marketplace who are also buying products.
James: Yeah, the bank partnership is very, very interesting. If I recall correctly, that partnership is not just straightforward buying, but it also helps you expand the marketplace program and make it better for other investors. Can you talk a little more about that?
Krista: Yeah, the bank partners is a very integrated partnership. In conjunction with the banks, we bring in assets like a line of credit to market and the thing is taking customers that today they have to say no to, moving them into our program where the bank funds 50% of the line and we fund 50% of the line.
So, all of a sudden, by sharing the risk and the bank is in a senior secured position By sharing the risk, the bank is able to start lending, we are able to bring cost down for borrowers which allows us to improve the overall credit quality of the portfolio and really just drive origination volume together.
James: Yeah, very cool. So maybe let’s talk a bit about the overall small business lending market. So in your view, how has this market evolved during the last couple of years? Has it been mostly moving in the same direction?
Krista: That’s a really good question. You know, I would say that one, I run into more and more business owners that are using online platforms so I think from a general market acceptance point of view, naturally increased like you’re seeing a lot more businesses go through. I think there’s been a lot of changes on the…..it’s generally evolved from if people lend you what are the credit criteria, how do the products get structured. I think that has evolved significantly.
I think what I’m excited about is we’re starting to see more platforms coming in in more niched segments and then also being able to take a client further along in online lending, if you will.
They don’t just get one small business loan and have to figure something out, I think we are starting to….and then also just change the expectations of borrowers that it shouldn’t have to be a huge process to get a line of credit, it should be easy and it hasn’t been, historically.
James: Yeah, I think there’s a lot to like in efficiency and just making the borrower experience better. Actually, you’re right, with your lending model you’re able to provide relatively flexible financing with the structure so that it’s not a one time loan, you have to renew it and re-negotiate and all that. That probably helps your borrowers quite a bit, especially if their cash position fluctuates.
Krista: Correct and the great thing about our bank partner program is that we’re offering businesses bank financing, but through our platform so they don’t have to go through the bank process which is often cumbersome, but they’re still able to access at more affordable cost of capital.
I think that’s the future, I think that’s where we are going to see banks and fintech partnerships really happen.
James: Yeah, best of both worlds. Maybe talk a little bit more about where you see the bank/fintech partnerships going as well as if you expect any other major changes in the small business lending segment.
Krista: I think when we’ve been out talking to banking partners, one of the things that comes up a lot is they’re constantly being sold technology. You know the banks….it isn’t usually enough to just buy the technology. I think banks/ fintech partnerships really do well is when you’re hitting the best of both worlds.
Fintech can bring technology. But providing technology is only one part of what we do.
What we’ve done is really think about the lending process in a whole new way and when we combine our way of thinking with the banks way of thinking + the technology and with the banks’ low cost of capital and frankly, trusted reputation in the market.
I think 50% of small business owners are going to go and talk to like five community banks before they talk to a fintech company. If we can leverage those two things, I think that’s where you get real partnerships rather than just saying sure, our technology platform, you know, shopping one way, they’ll become like a partnership, two partnerships.
So I think that’s where successful banks/fintech partnerships are going to go in the small business space. You know, it’s hard for me to say, I think I honestly think it will just continue to grow.
Still online lending is not a significant part of the market and as we see Amazon and Google get into the space, it is absolutely going to change.
I wish I knew exactly how, but I’m really excited about it. I think at the end of the day, it’s going to be great for businesses.
James: Yeah, it’s tremendously interesting and I think a lot of people have talked about Amazon coming into the space, a major marketplace or enabler and so on.
That’s all good obviously for businesses that do a lot of online retailing, but there’s so many traditional brick and mortar companies that still need financing, but can still use efficiencies.
I think that’s where you guys come in and you serve them very well. Do you see any changes in regulation, any changes in environment that’s either positive or negative for this online lending market?
Krista: We are just only paying attention to just what’s happening in the market generally and being aware that we’ve been in a great cycle and it’s unlikely to last forever and just making sure that we’re prepared for it. I would say that is the most important thing that we’re looking at today.
James: Yes, speaking of cycles, how do you expect your lending products to fare during a recession?
Krista: Well to be honest with you, we expect it to do pretty well off only because what happened in the last cycle. Banks constrict their C&I lending considerably so they’re shunning the bottom 25% of their portfolios. We’re able to do the same thing and there has been a lot of businesses that are coming into the alternative lending space were today being served by banks.
From a growth perspective there’s a lot of opportunities provided you’re really monitoring your credit quality, you have strong processes in place that protect us, you know, in the event of a bankruptcy which is really what you worry about in that kind of environment.
James: That’s very fair, especially since you are lending against receivables and you have been fully monitoring them. I’m sure it helps mitigate some of the downside risk.
Krista: Absolutely, you have to make sure that the receivables will actually get paid by that verification process. You know, you do more to make sure your collateral is good and you’re able to reduce your credit risk by putting in more controls which today are hard to put in because borrowers have so many options.
James: Yeah, that’s very true, that’s extremely insightful. So before I let you go, can you talk a little bit about what you’re working on for 2018?
Krista: Definitely, more tech. So we’re actually rolling out some really full technology on the credit and risk monitoring side because what we have to do is understand how are payment trends going, are the receivables good quality. We have a really cool i-Tech coming out on that front and more big partnerships.
We are already in talks with our few next bank partners, we’re expecting it to be a really exciting year for us
James: That’s awesome. Well Krista, thank you so much for taking the time to speak today and good luck!
Krista: Thank you so much for having me.
James: Thank you.