A startup gets into the small-biz lending market Square, PayPal built

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FundKite executives watched the small-business lending sector evolve — and determined that the trend of mobile point of sale providers offering loans and cash advances was limiting the market.

The likes of Square and PayPal have been using their mobile point of sale devices as both a measure of creditworthiness and a means of repayment. Square Capital, for example, bases its offer on the revenue it observes being collected through Square hardware; it then collects repayments as a portion of future Square payments. FundKite looked at this model and asked: What about the merchants who don't want to limit themselves to the funding options of a single mPOS provider?

Deploying a network of more than 1,000 independent sales organization partners to reach small merchants, FundKite operates under the premise that these brick-and-mortar businesses need an option to obtain funds quickly without any strings attached as to what devices or marketplaces they are using. Otherwise, its merchant cash advance and repayment model isn't very different from what Square and PayPal offer.

"It's a very open-ended type of funding because we buy a percentage of the merchant's future receipts, so if we are going to give the merchant $100,000 we may set it up to take 10% of their sales to pay for that over time," said Alex Shvarts, chief technology officer and co-founder of FundKite.

After evaluating a business "on several fronts," FundKite creates a view of the company's financial health and its cash at hand, as opposed to the credit score of the business owner, Shvarts said. "Our offer to buy future receipts could be anywhere from 15% to 25%, depending on the risk factor involved with the company."

Square Capital, PayPal Working Capital and Amazon Lending have captured a significant part of the small-business financial aid sector, much of it e-commerce related. For Amazon, other factors come into play, but the loans are for those merchants who operate in the Amazon marketplace and maybe even use Amazon for product storage and other services.

Though not their only target for business, FundKite can provide further service to those merchants who may already be locked into their provider's funding options.

"We get a lot of merchants who have other loans from maybe PayPal or Amazon, because they have more funding needs and they have other sales and monies coming in from cash deposits, check deposits or maybe through other processors," Shvarts said.

Because FundKite is not limited to just the cash flow on any specific system, it can help the merchants get needed funds quickly and allows them to take advantage of their full receivables and sales, Shvarts added.

Shvarts admits FundKite engages with a somewhat risky product, depending on the circumstances facing a company. "It is unsecure funding," he said. "If they go out of business, there is nothing we can do about it, and our discounts are high because there is more risk involved."

Based in Manhattan in New York City, FundKite has provided funding for 27,000 merchant deals in its three years in business and says it is on track to fund in excess of $100 million.

The ISOs selling FundKite advances to merchants are generally affiliated with card processors, or have a niche in selling technology or other services to merchants.

"A card processor with 5,000 merchants may have many of those merchants looking for additional funding, and the ISOs make a referral fee on any business we close," Shvarts said.

Merchants accepting funding through FundKite generally monitor their payment history and balances through email requests or phone calls, and the company is launching a merchant dashboard in mid-August to make it easier for business owners to view their funding details.

"Not all of the merchants are tech-savvy, so not all of them are requesting to see their funding information," Shvarts said. "But we are very transparent with our merchants and want them to be able to access their information when needed."

FundKite's algorithms scrutinize all deals through artificial intelligence and other tools, while also helping the company manage the ISO deal flows, reports and commissions.

The company says it provides needed funds to merchants within 24 hours after the review process.

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