Peer-to-peer lending and crowdfunding are well known as ways for SMEs to access alternative finance but now there’s another model, whereby the borrower pays a percentage of its revenue to the funder. We talk to revenue-based financing company Fleximize to find out how it works
13th August 2014
As bank lending to SMEs continues to fall – dropping a further £700m in the first quarter of this year – alternative finance providers are stepping in to fill the void.
The headlines tend to be dominated by peer-to-peer lending and crowdfunding platforms, but meanwhile other financial models are breaking through.
In January, former Citi banker Max Chmyshuk launched Fleximize, offering revenue-based financing to small businesses. Its revenue advance is similar to a loan, with a pre-agreed amount to repay.
But instead of paying fixed instalments every month, the borrower pays a percentage of its revenue – with payments rising or falling depending on the company’s performance. Fleximize takes a fixed percentage as a fee.
Chmyshuk compares the system to a merchant cash advance, where retailers repay the advance directly through their card payment terminals each time a transaction is made – although his customers already come from a broader background than retail. In the entertainment sector, the model is better known as royalty-based financing.
And in the past it has also been used in the oil and mining sectors, and for biotechnology and some medical applications in the 2000s when venture capital dried up because of the dot-com bust. “Then someone in the US had the brilliant idea to apply the model to small business financing,” he says.
He adds that the model hasn’t been popular historically because it’s not the most straightforward concept to grasp. But he tries to make it simple: “Say, for example, you’re in ecommerce and you want to buy three months’ inventory from China instead of one, in order to get a discount.
If you borrow a revenue advance instead of a loan, you’re not so worried about the shipment being delayed by a couple of weeks, or your initial marketing effort not being so successful, or it being a bad season, because you’ll pay at the speed of your business [performance]. If you sell this stuff four months later it’s still OK – we don’t topple your business.”
Chmyshuk sees revenue-based finance as a third option sitting between equity and debt – offering the flexibility of the first and lower risk than the fixed payments of the second, without diluting ownership.
And he believes it’s more suited to online businesses, such as those in ecommerce, which don’t have many assets to secure traditional loans. “They have good cash flows and good prospects; they just need that little boost to get them to the next level.”
In its first six months of operating, Fleximize had handed over funds worth almost £2m – from Chmyshuk’s lifetime savings as well as from outside investors – to more than100 businesses. The average loan has settled at between £15,000 and £20,000, with the largest at £75,000.
Although he says this year is about “taking it one step at a time” to firmly establish the company and build the portfolio to around £5m, Chmyshuk would like his company to be a £100m business in four or five years’ time. He believes this goal is achievable, with the rise in acceptance of alternative finance.
“The UK banks still control about 80 per cent of the market. In the US, it’s reversed – ‘new age finance’ alternative lenders take around 80 per cent of the market. Obviously the US is a slightly different beast, but it’s a good benchmark to look at.
Maybe we’ll never achieve 80 per cent alternative, but we could definitely grow that share quite substantially,” he says.
“There is a perfect storm for this business right now. There’s a lot of political will to increase financing to small businesses but, at the same time, banks are either unwilling or unable for whatever reason to fill those gaps.”
Nevertheless, the environment is a challenging one for financial startups. It took Chmyshuk six months to set up the platform and get the necessary licences. He credits the government’s GrowthAccelerator programme, run by Grant Thornton, for its support and its access to mentors and other growing businesses.
And, as well as joining the CBI, Fleximize is looking to collaborate with others in the alternative finance sector, through organisations such as Alternative Business Funding and FinTech UK.
“There is a growing [alternative finance] community,” he says. “And the government is taking steps to help us – it’s just a question of execution. It takes time and effort, but we hope we’ll all get there.”
But Chmyshuk is also all too aware that the regulatory goalposts will move. “In the next 24 months, there will probably be a lot of changes,” he says.
Fleximize has a consumer credit licence, granted by the Office of Fair Trading, in order to fund sole traders. In April, OFT’s regulatory power was transferred to the new Financial Conduct Authority (FCA), alongside that of the Financial Services Authority (FSA), and Chmyshuk believes the new body is likely to tighten up the regime.
I’d rather that the industry has regulation to make sure those with similar offerings are compliant, ethical and so on.
“But in my banking life, I was an approved FSA individual. I was always regulated. So, for me, it’s nothing new,” he adds. “I see it as a positive because there is a void in this industry and people can come from anywhere to fill it.
I’d rather that the industry has some regulation to make sure those with similar offerings are compliant, ethical and so on.” New competitors will enter the space, adds Chmyshuk.
However, he is not only adamant that Fleximize will comply with “whatever comes our way”, but also he doesn’t think that the challenges will get in the way of rapid – and perhaps international – growth.
The company already offers successful applicants the choice of taking out a standard “flexiloan” instead of the revenue advance, and Chmyshuk is now looking at adding other products, including merchant finance and commercial cash advances.
He is also proud of the “relationship lending” model that Fleximize uses, which gives the applicant a single point of contact throughout the process. This makes the company very different from a conventional bank, he says. “Such personal experience in a typical bank is reserved for large corporate clients, whereas SMEs are forced to speak to the bank via a call centre.”
With the company facing many of the same challenges as the SMEs it serves, Chmyshuk is enthusiastic about supporting their growth. “Our aim is to find – and fund – as many businesses with growth ambition as possible,” he says.
- Founded: January 2014
- Employees: 10-15, including developers
- Customer base: 100+ small businesses
- Loan book: Around £2m