It’s a frustrating paradox for any small- to medium-sized business (SMB) entrepreneur: You have to have money to get money.
At least, that’s what it may feel like for many SMBs that seek financing to grow their businesses, particularly online businesses with an asset-light business model. For traditional lenders with a low appetite for risk and unfamiliarity with how to underwrite that type of business, SMB borrowers must prove their creditworthiness with an extensive history of solid cash flow or pledge personal collateral, like their home, to get funded.
There may be few other options. Raising money via the venture capital route takes time, and in many cases, connections via a personal network. Receivables-based financing provides cash but often at a high price.
Andrew D’Souza, co-founder and CEO of Clearco (formerly known as Clearbanc), said there are plenty of drawbacks to these capital sources — not least of all is that they fail to bridge the gap between getting capital in the hands of the business owner and giving them the other tools they may need to wisely put that capital to work.
“Equity may be the right choice for a company investing in R&D, but for the vast majority of small businesses in need of funding for everyday spend, having to pitch their company to investors and give up stake and control in their firms is not the best move,” D’Souza noted.
Filling that gap was the genesis of Clearco and its revenue-based financing model for online businesses, D’Souza explained. Clearco actually took a page from the brick-and-mortar business merchant cash advance book, a financing tool that advances funds to a business on the basis of future sales as determined by credit card receipts. But Clearco has a twist that goes beyond putting sums of cash based on future sales into their bank accounts. Clearco provides funding for “repeatable, low risk activities” such as inventory purchases or advertising spend for online sellers who can demonstrate a strategy to find “the next customer” and not only serve the ones they have.
The 20 Minute Term Sheet
D’Souza was quick to point out that this revenue-based financing model is not a free pass for any SMB that wants funding to buy ads or inventory. Finding suitable borrowers is the work of the company’s proprietary, artificial intelligence (AI)-driven 20-Minute Term Sheet that integrates with a variety of eCommerce, advertising and other platforms to determine past achievement of driving revenue and success from current and prior marketing initiatives.
For Clearco, several factors make an SMB an attractive candidate, starting with the fact that the business has to do business online. Software and eCommerce firms with a digital presence and the ability to deliver goods and services online are often best positioned to connect with customers (and, therefore, boost revenues), he explained.
“I would argue that the reason many [smaller online sellers] are not successful is because they either don’t have access to capital, or they don’t spend it in the right places,” he said, adding that if an SMB is advertising correctly and has its distribution strategy down, even niche products can gain significant traction.
In addition to having a digital presence, D’Souza said fundable SMBs also understand how to use the capital they secure in a repeatable way — that is, repeat the success of recent customer acquisition or press attention. Funding a company that understands where to find its next customer is key to success.
Even in an increasingly crowded digital market, he insisted online SMBs have the potential for success even though the barriers to establishing an online business presence are now lower than they once were. Not every entrepreneur will understand the best path forward. That’s why D’Souza noted that, for a performance-based financing model to be successful, it must inform the borrower’s operational and financial success.
As such, coupling capital with data-driven insight and support has become a focal point for Clearco. Developing an ecosystem of SMBs with a range of service providers and expert support, as well as investing in data-driven technology to not only underwrite financing but identify growth opportunities, is a necessary but often overlooked funding tactic.
That’s especially true in today’s market, in which organizations are quickly shifting business models, embracing omnichannel sales strategies, and expanding internationally into unfamiliar territory. By combining access to capital with a form of an accelerator program that provides those useful business insights, the ability for a business not just to pay back a loan, but thrive and remain a longtime partner, can yield endless opportunity. D’Souza said such an approach makes the Clearco platform different than a traditional online lender.
“The only limit to growth is access to capital and knowledge of what to do with that capital,” he said. “If [a business] has both of those things, you can grow infinitely.”