A Canadian entrepreneur said his dual interests in disruptive technology and the need to help Canadians led to the creation of Canada’s first marketplace lender for small businesses.
Steven Uster said the idea for FundThrough began back in 2009 when he was an investment banker in New York. It was then that he returned to Toronto and talked to many people who had trouble getting loans from banks.
The problem was not that these businesses were yet to be established, Mr. Uster said. They had extensive clientele and stacks of purchase orders on their desks, but banks did not seemingly recognize that when assessing risk.
Mr. Uster was also interested in how technology could help startups disrupt existing sectors, so he partnered with two associates – his mentor Deepak Ramachandran and Graham McBride. Mr. Ramachandran had established several businesses in software, outsourcing, and electronics and was an active angel investor. He was working at hedge fund Bridgewater Associates. Mr. McBride was the Managing General Partner of VenGrowth Group and built MezzGrowth Group.
Mr. Uster said the initial idea was not to facilitate easier access to capital, but it soon became apparent there was a tremendous need in that sector. That is when FundThrough began investigating the feasibility of using technology to make small loans profitable.
“The stats say loans under $250,000 are not profitable,” Mr. Uster explained. “It also takes 30 person-hours to apply for one.”
The three partners tested the concept and found a need, so they set about building the technology and raising the capital. They secured seed funding from Real Ventures, a leading Canadian seed stage capital provider.
“We wanted to grow FundThrough into a marketplace lender for secured small business debt where we reduced invoice payment terms to 24 hours,” Mr. Uster said. “What could businesses accomplish with those terms?”
When discussing the types of normal cash flow problems that FundThrough targets, Mr. Uster came up with the prototypical Canadian example: A client approached FundThrough for bridge financing after securing a large snow-clearing contract for a major Canadian hardware chain. It was a step up for the client but it posed a problem.
The payment terms were 45 days, but the client needed to pay his contractors after every snowfall. FundThrough was able to help him bridge his gap and pay his employees.
Mr. Uster explained that when a small business is confident in its ability to pay its core expenses they are free to take steps that can expand that business.
“There are so many applications for this business,” he explained. “The client can buy traction salt in bulk (in the) off-season at a discount.”
“Suppliers may give a discount if he pays early, so he buys more equipment.”
Mr. Uster cited another example of an IT outsourcing company who was turning away profitable customers because onboarding them required a large upfront cash investment before a long-term recurring monthly revenue contract kicked in. After meeting with FundThrough, the company created a plan to buy computers, install them at client locations, lease the systems to those clients and enter into long-term IT contracts with them which FundThrough was able to fund.
“Turning away profitable customers makes my mouth drop,” Mr. Uster said.
When asked how technology influences invoice factoring, which has been around for (the plural of millennium), Mr. Uster says you can take much of what you know and throw it away.
Thanks to technology, FundThrough offers lower cost, risk appropriate solutions and unlimited access to capital.
“We have funded invoices ranging in size from a couple of thousand dollars to a $700,000 one from Walmart.”
Because FundThrough looks beyond the requesting company itself companies that struggle to obtain capital from traditional sources, Mr. Uster explained, saying decisions are also based on who you sell to.
With both education and work experience on both sides of the border, Mr. Uster says there are some differences in financing and even between the entrepreneurs themselves.
“In the United States, there is a wider range of traditional banks, community banks, and online lenders,” he explained. “In Canada there are fewer top banks and credit unions then there is a huge vacuum.”
Canadian business people are also more likely to do all of their personal and business banking at one location while Americans do not mind unbundling their financial services.
“The first place a Canadian entrepreneur goes for access to capital is the bank,” Mr. Uster said. “If a bank turns them away, the next step can be hard.”
The Canadian financial system is also more conservative than its American counterpart, so Mr. Uster knows FundThrough has to work to gain borrower trust. That step is easier because FundThrough is backed by well-known venture capital firms and investors, he added.
Marketplace solutions are not as well known in Canada so sector awareness is lagging but once it catches up Mr. Uster believes they will be just as popular.
New companies test FundThrough by starting with small invoices and graduate once they see how simple and quick the process can be.
Another important difference between the two countries is the United States has a much more well defined peer-to-peer regulatory framework which allows retail investors to participate in fractional loan ownership.
“It does not impact FundThrough, but it would be nice if the average Canadian could earn greater returns this way.”