Pay-as-you-earn SME lending market exploding

It’s well known managing cash flow is one of the hardest things for SMEs to do. Which is why over the past few years, there has been an explosion in what is now commonly termed the ‘pay-as-you-earn’ lending market.

The trend was further solidified this week with the news UK based ‘pay-as-you-earn’ lender Liberis had raised close to £60 million in fresh funding to support its growth.

The majority of funds raised was reportedly debt, with an equity investment made by venture fund Blenheim Chalcot.

The raise represents yet another successful outcome for the British Business Bank, the HM Government’s wholly owned development bank, who, along with other commercial banks, is said to be providing Liberis with its debt facility.

Of course Liberis aren’t the only player in the UK business cash advance market, looking to feed credit hungry SMEs. PayPal were reported to have extended more than £400 million in credit to British businesses as of half way through 2017 via its Working Capital product. Liberis is sitting at about half this amount, having been in operation since 2007.

While all very impressive, Amazon, with US$1B lent to online sellers in the US, UK and Japan over the course of 2016/17, certainly puts things into perspective. Yet its Achilles heel is the requirement to sell and trade inside the Amazon platform, something plenty of small businesses don’t do –  like the bricks and mortar businesses Liberis targets.

While there is no doubt Liberis is helping thousands of British businesses access capital they wouldn’t otherwise be able to secure, it doesn’t mean we shouldn’t also critically think through the rise of this lending model now employed by a growing number of eCommerce and fintech businesses.

Just as there is a dark side to buy now pay later consumer finance products, which have exploded globally in the last few years, there is also a dark side to pay-as-you-earn products for SMEs.

Small businesses can become overly reliant on injections of regular financing through these products, without actually creating real long-term business value from that debt. And when lenders that peddle in this type of finance expect borrowers to be recurrent, it can pose a commercial ethical dilemma.

The risk with convenience, is that it can dissuade business owners from migrating to lower cost debt. A new entrant entering this space, competing against Liberis, Amazon, PayPal, Square and American Express, who also offer cash advance type products, would be wise to consider a model that helped businesses find a path towards lower cost, longer term financing options.

Because while pay-as-you-earn is certainly plugging a gap, and having its moment in the sun, unless its APRs become competitive with other debt options, the gloss may eventually wear off.

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 and the Gig Economy.

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