What’s the Trojan Horse distribution strategy for online business lending?

Tama Lever, Flicker
Tama Lever, Flicker

An efficient and unique product distribution model is critical if you want to scale your business. This is evident in the small business online lending space. Why? Well, as competition increases in the sector within well-trodden distribution channels, two things happen:

Customer Acquisition Costs (CAC) in popular channels will increase

More lenders are now fighting for the same customer. The online advertising space is a good example where this battle is played out, with costs usually spiralling upwards. Here, those with the deepest pockets tend to win – think Amazon against the average bookshop as a sector parallel – although it can be costly and unsustainable even for them.

As a point of reference, in Australia, the Cost per Click (CPC) for ‘business loan’, or some keyword variant, is currently around AU$20 -$30. In the U.S. the numbers are a little less friendly – CPC is more likely around the US$50 mark, according to SEMRUSH.


And if we look at the search data from Google Trends for ‘online loan’, we can see a clear trend upwards over the past couple of years.


Life Time Value (LTV) for base product will go down

Competition means more choice, which ultimately results in discounting to win a customer to maintain sales volumes and growth targets. This is true if your product is non-differentiated. And, I would argue most small business online lenders fall into this category.

So what options do you have as a small business lender to maintain healthy margins?

  1. Make your product its own distribution network – the Trojan Horse strategy

This is probably the hardest to achieve, but probably the most defensible in the long run. In small business lending, the best examples of this strategy in play are the new breed of Merchant Cash Advance lenders: PayPal Working Capital, Square Capital and Shopify Capital.

These companies start by capturing a more utilitarian and ‘winnable’ section of market – payments. PayPal had the first mover advantage – of course now it is more difficult to replicate their success in payments. Square and Shopify however realised you could compete by bundling in a point-of-sale with payments to create a more defensible product. They make it easy for a small retailer to get started without having to ping themselves around 3 – 4 different providers (bank, POS, integration software provider, hardware provider).

Of course, with thousands of merchants on their books, now their lending options are on-tap for an existing customer base. They fit in with their target market’s cash flow patterns – daily repayments for lending facilities are simply a percentage of each day’s takings.

  1. Find ‘greenfield’ distribution strategies

I liken this to finding mutual ‘win-win’ opportunities with partners close to a small business lenders target market. If a small business lender can help another business grow by recommending their product without having to pay a commission then this can have a huge impact on lowering CAC.

It’s not evident anyone has cracked this in the lending space. Yet if we look to the SaaS space, we see lots of examples of consulting/advisory businesses that have built a completely new business service around implementing Salesforce, Xero or point-of-sale platforms.

In Australia we have the emergence of the ‘cloud integrator’, the advisor that understands what mix of cloud platforms and integrations you need to ‘knit together’ for your specific business or vertical. There is nothing to say a lending solution or banking piece can’t be part of this.

  1. Use a mixture of ‘tried and tested’ distribution strategies

Affiliate programs

Small business lenders like OnDeck incorporate affiliate programs into their marketing mix. The payout to an affiliate partner is 2 percent of the Net Sales amount. They don’t pay for leads generated.

Interestingly, Square does not offer an affiliate program. Shopify offers one for its core product, but doesn’t seem to offer one for lending – why would it need to?

Business broker referrals

This is where things can get expensive, and market commentary suggest the amounts paid to brokers to close deals has been on the up.

However online brokers and aggregators are also entering the market, aiming to disrupt and displace these human brokers. Fundera copycats are popping up all over the place at the moment, courting online lenders.

Yet differentiation in the space is also weak, as is disclosure to business owners about what fee the aggregator is earning for each ‘match’. How is it possible to know what is being served up isn’t being affected by commissions earned – the exact same problem in the traditional brokerage model? Back in 2014, a Bloomberg article reported commissions of up to 31 percent of the loan being paid to preferred brokers by online lender CAN.

The reality is, disrupt or be disrupted is just as true for product strategy as it is for distribution strategy. Small business lenders that look outside the box for who can influence, educate and shape the decision making process of a small business owner will have the most success. That is, if they are able to deliver value for money compared to their competitors.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.


  1. Great Article Jess. I couldn’t agree more. In the Australian fintech market, it will be interesting to see which lenders can sustain growth at such a high cost of acquisition. The SME market is one of the most opaque and costly markets to sell into. The earlier you are able entrench your product into the customer journey, the better chance you have at controlling your cost of acquisition and retention.

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