Saying goodbye to the FICO score
One advantage over banks, if you ask the tech companies, is data. Stripe and others are shunning a FICO score, the traditional way of assessing credit-worthiness. Instead, they use payment history from their own platforms. Stripe, for example, will draw data from “advanced algorithms” to trends like payment volume, percentage of repeat customers, and payment frequency.
Stripe said the reliance on tech allows them to issue loans quickly. According to the company, there’s no “lengthy application, eligibility is determined quickly, funds hit a user’s Stripe account the next day, and businesses can repay as they earn.”
These tech companies collect the loan repayments as sales come through, instead of setting payment dates on the 15th of the month or another arbitrary day, which they say alleviates a burden for companies.
Still, some have flagged inherent risks in lending to small start-ups. Karen Mills, a senior fellow at Harvard Business School and former head of the U.S. Small Business Administration during the Obama years, told CNBC earlier this year that an inevitable downturn in the economy could hit these companies the hardest.
“Having run small businesses through three different economic cycles, I would say we should expect another cycle and one has to factor that in,” Mills said. “Small businesses get hurt very hard in cycles particularly those who are dependent on Main Street sales.”
Stripe, which ranked No. 13 on the 2019 CNBC Disruptor 50 list, was founded in 2010 by Irish brothers Patrick and John Collison. CEO Patrick Collison announced on Twitter earlier this year that former Google Cloud CEO Diane Greene was being added to the board.
It has become an attractive bet for venture capital as consumers overwhelmingly move to online payments. The San Francisco-based start-up has ushered in investments from Andreessen Horowitz, Peter Thiel, Elon Musk, Google’s venture arm Capital G, Sequoia Capital and Kleiner Perkins, among others, according to PitchBook.
As a result of the booming venture capital interest, it’s now one of the most valuable “unicorns” — private firms worth more than $1 billion — in the U.S., and is by far the most valuable private fintech company. Cryptocurrency exchange Coinbase is the next largest with an $8 billion valuation, according to CB Insights.
- Stripe Capital’s full integration with Stripe means there’s no lengthy application, eligibility is determined quickly, funds hit a user’s Stripe account the next business day, and businesses can repay as they earn.
- In addition to serving Stripe users directly, Stripe will also extend Stripe Capital to its platform partners (such as online store builders and B2B SaaS companies), enabling them to offer their own business users access to smart financing.
SAN FRANCISCO, SEPTEMBER 5, 2019 – Today, Stripe launched Stripe Capital, an easier way for internet businesses running on Stripe to access capital.
Access to capital remains a challenge for most companies, especially online businesses. Banks have cut their lending to small businesses almost in half over the last decade, and 70% of businesses say they don’t have access to the level of funding they need. Those who succeed at getting loans report spending more than 25 hours on applications and paperwork, and then waiting weeks or months for approved funds to actually become available to them. Startups and small businesses create a disproportionate number of jobs, yet these are the very companies whose access to capital has been most curtailed.
As a result, easier access to capital has been one of the top requests from Stripe users over the past two years.
With Stripe Capital:
- Access is quick: no lengthy applications or collateral obligations; approved funds typically hit a business’s Stripe account the next day.
- Eligibility is data-driven: eligibility is determined based on a company’s history on Stripe. Drawing on data from Stripe’s extensive business network, advanced algorithms analyze hundreds of relevant signals for each business, including payment volume, percentage of repeat customers, payment frequency, and changes in revenue growth.
- Repayments are automated and flexible: businesses repay money as they make money. They repay the loan with a fixed percentage of daily sales; there are no recurring interest charges or late fees.
- Platforms can offer access to capital to their business users: in addition to businesses running on Stripe directly, Stripe Capital is also available to platforms and marketplaces on Stripe Connect. These B2B platforms can now offer their customers smart financing, with access powered by Stripe.
“Stripe Capital makes it easy for internet businesses to get the funds they need, when they need them,” said Will Gaybrick, Stripe’s Chief Product Officer. “It’s important to think about financial inclusion not just in terms of consumers, but also in terms of businesses. Businesses, especially small businesses and startups, are the engines for job creation in our economy. It should be trivially simple and lightning fast for them to access the capital they need to smooth their cash flow and invest in their own growth.”
Xirsys provides server infrastructure for powering WebRTC applications and services. When Xirsys needed more server capacity to meet the demand of its users, Xirsys turned to Stripe. “Stripe Capital helped us expand our global footprint,” said Richard Blakely, Xirsys CEO and co-founder. “We used the funding to set up servers in China, India, and Japan, allowing us to reach customers all over the world. Since then, we’ve seen our annual revenue more than double.”
“Traditional funding sources have not adapted well to the internet or the new business models it has enabled,” said Jordan McKee, research director at 451 Research. “Stripe Capital is designed for modern internet businesses seeking help with their cash flow who need quickly accessible and easy-to-manage funding. With Stripe Capital, Stripe has removed significant complexity that previously barred many smaller companies and startups from access to the funds they need to grow.
“The platform use case represents a powerful distribution model for small business lending built entirely for the internet commerce era,” McKee continued. “It allows capital to travel across an extensive network to reach a huge long tail of small businesses that have been starved of funds.”
Starting today, Stripe Capital is available to Stripe users in the United States. Stripe will facilitate access to the loans, handling the servicing and collection process on behalf of its bank partner, by whom the loans will be issued.
For more information, visit www.stripe.com/capital.