Financing start-ups – shrewd, brave or foolhardy?

What does Market Invoice (MI) know that its rivals don’t?

News that the invoice financing platform is moving into straight term loans for SMEs is perhaps not so much of a surprise, but what does raise the eyebrows is the fact that it is taking deliberate aim at business start-ups with a minimum trading period of only six months and upwards.

Conventional wisdom has it that equity finance, rather than debt, is more appropriate for early stage finance, which is why the clearing banks have always given this end of the market a wide berth. Even major P2P business lending specialists have tended to concentrate on SMEs with two or three years of accounts filed at Companies House, on the basis that at least they have survived beyond those first critical months to establish some sort of financial track record. So, depending on your point of view, MI’s move could be viewed as (in descending order) shrewd, brave or foolhardy.

The last of these interpretations reflects the fact the bigger platforms, like MI, have spent vast amounts of money establishing their brands and scaling up their operations in anticipation of large business volumes. The beasts they have created need regular feeding with ever larger portions, not least because most them are still haemorrhaging money in pursuit of their all-out growth strategy – shareholders and other backers will one day expect to see a return on their investment.

The latest MI accounts showed that, despite increasing turnover to £4.4m in 2016 (up from £4.1m in 2015) and financing £442m of invoices (£328m), the business lost £6m before tax, almost double the 3.1m deficit for the previous year.

Product development and diversification are part of the maturing process, but it is significant that consumers have been far more willing to rack up debt than small businesses which recently have shown a marked reluctance to borrow because of, among other things, uncertainty revolving around Brexit and the threat of rising interest rates. We also know that some of the larger platforms are bracing themselves for higher default rates; Zopa, for example, recently announced that it was tightening its lending criteria to help mitigate the trend. But, then, it is also pushing ahead with its plan to turn itself into a bank.

So, back to the original question: what special insight does MI have over other business lenders? Apparently, the company is relying on its business credit underwriting experience, slick technology and the expertise of its workforce – also on its ability to turn loan applications round within 24 hours (not spectacularly quick, by the way. Ask RateSetter). Let’s hope that’s enough.