By Sasha Banks-Louie
The hope of achieving the American dream has, for decades, been the life force of economic innovation and growth in the United States. But for the country’s nearly 30 million small businesses, it takes more than entrepreneurial spirit to realize that dream, let alone sustain it. According to the US Small Business Administration, the top two reasons small businesses fail are sluggish cash flow and limited access to financing. Yet the huge amount of capital required to get a business loan from a bank has led many small-to-medium businesses (SMBs) to seek alternative sources of financing, such as merchant cash advances from lenders such as Biz2Credit.
Location: New York City
Industry: Financial services
Oracle products: Oracle Open Banking Platform, Oracle Blockchain Cloud Service
Length of tenure: 10 years
Education: MS in international finance, Columbia University
Personal quote/mantra: “Never stop improving yourself. If you stay stagnant, you will be outrun. Always strive to be a better, stronger version of yourself tomorrow than you are today.”
Unlike most banks that expect a business owner to have an existing source of collateral to secure a commercial loan, a merchant cash advance lender takes a percentage of a company’s future credit card sales as repayment.
“A small business may not have enough inventory, cash deposits, or equipment to offer a bank as collateral,” explains Venkatesh Bala, chief risk officer at Biz2Credit. “In most cases, however, a merchant can sell a portion of its future credit card sales to acquire a cash advance immediately.”
Launched in 2007, the New York City–based financial technology (fintech) firm has developed an online marketplace that helps SMBs get access to short-term funding through alternative lenders, such as specialty banks, hedge funds, and credit unions. Cash advances range between US$5,000 and US$200,000, and approvals are made within a few days. Rather than having to come up with collateral, Biz2Credit just requires SMBs to show proof that they’ve been in operation for at least one year, have monthly credit card sales of at least US$10,000, have not declared bankruptcy in the past year, and are free from liens or other judgments filed against them.
Biz2Credit’s lending platform pulls data from an SMB’s financial summaries, tax records, and payroll data, and then shares the data with its member lenders on the company’s online marketplace. These lenders can also view digital loan applications and calculate financial ratios (such as profitability, gross margin, and debts to assets), and then determine the best payment terms and interest rates based on each borrower’s risk profile. The Biz2Credit platform also allows lenders to configure their own business rules and generate scorecards to help make accurate funding decisions. Lenders can order third-party data from credit bureaus, banks, and the IRS directly from the platform, which is automatically formatted for running reports on cash flow analytics.
The blockchain keeps a ledger of all the receivables and every payment, and then will automatically set up spread payments in the settlement ledger to accommodate revenue spikes and dips.”–Rohit Arora, Cofounder and CEO, Biz2Credit
After a lender approves an application, it buys a fixed percentage of the merchant’s future credit revenues, often at a discount, with an average payback period of between 6 and 12 months. To date, Biz2Credit has matched more than 350,000 SMBs with hundreds of lenders and has helped originate more than US$2 billion in cash advances globally.
Because Biz2Credit’s dataflows are automated and available in the cloud, lenders who participate in the Biz2Credit marketplace can view the merchant profiles immediately and return an approval within seconds. But the company’s platform connects only to partner feeds from banks and a few credit card payment processors, limiting Biz2Credit’s ability to verify all of a merchant’s financial transactions directly from the merchant’s book of record or general ledger systems.
As a result, Biz2Credit sees only a limited view of transactions that have happened in the past. “Without real-time visibility into a merchant’s entire credit portfolio, we’re exposing ourselves and our lenders to significant risk,” Bala says.
But collecting all of the data associated with a merchant’s credit portfolio can be a complex task. For example, if a merchant uses a credit card with Chase Bank to purchase some items for a store, and then the store books US$10,000 of revenue, Biz2Credit gets a split fee of 10 or 15 percent directly from the credit card receipts provided by the payment processor. Because Biz2Credit collects the fee directly from the credit card processor, if the merchant switches credit card processors, it’s very difficult for Biz2Credit to know that a switch has occurred, track down the new processor, and then collect its fee.
For Biz2Credit, such collections can take weeks and require the company’s underwriters to manually verify each merchant’s account status by calling banks and other financial institutions to get an accurate read on the borrower’s finances and ability to repay the loan.
The only way to get a complete view of a merchant’s financial transactions is if the merchant opts in to give direct access to its enterprise resource planning (ERP) systems. Through this sort of permissioned access, Biz2Credit is able to track all of the merchant’s audited financial statements and credit card receivables, regardless of which card processor is used. The result is less risk for Biz2Credit and its lenders and more favorable terms for merchants.
We can now see the risk profile of merchants in real time and can make more-informed decisions about their ability to pay.”–Venkatesh Bala, Chief Risk Officer, Biz2Credit
Biz2Credit’s platform wasn’t designed to access third-party data directly, let alone ensure that the connection is secure and coming from a trusted source. However, using the built-in API layer that connects to Oracle ERP systems, the Oracle Open Banking Platform can help Biz2Credit pull payment processor transaction data into a single smart contract that allows the merchant’s credit card receipts to be shared with the company and its lender partners. Secured by Oracle Blockchain Cloud Service, an application within Oracle’s platform-as-a-service portfolio that catalogs and securely records financial transactions between participants on a shared blockchain ledger, the contracted parties can control which financial data is shared and with whom.
After seeing demonstrations of the Oracle Open Banking Platform, Bala and other executives from Biz2Credit decided to test the platform for its marketplace by creating a smart loan contract using Oracle Blockchain Cloud Service. Using the APIs from the Oracle Open Banking Platform, calls are made to the Oracle Blockchain Cloud Service application, which automatically pulls in credit card receivables and audited financial general ledger information from a merchant’s ERP application, helping Biz2Credit record the transactions, share them with lenders, and then enforce the loan contracts securely and in real time.
“Oracle Blockchain Cloud Service gives Biz2Credit a direct line of sight to the cash flow, debt-to-loan ratios, and other financial metrics that merchants agree to share,” says Sanjay Mathew, senior director of financial services and head of the Oracle Open Banking Platform. “The extensive visibility assures lenders that merchants will fulfill their financial obligations based on the terms of the contract,” Mathew says.
Using Oracle Blockchain Cloud Service, Biz2Credit helps lenders verify the terms of the cash advance in real time and compare those terms against the merchant’s audited financial data on the blockchain. These capabilities allow lenders to quickly identify merchants that have the lowest-risk profiles, offer them the most-favorable terms, and ultimately close more deals.
Another reason Biz2Credit chose to pilot the Oracle cloud platform is the fact that hundreds of thousands of SMBs are currently using Oracle ERP applications, NetSuite’s SuiteCloud ERP platform, and NetSuite’s SuiteGL application. “One compelling advantage of using the Oracle Open Banking Platform is the embedded blockchain layer that can connect directly to Oracle ERP applications and permissioned customer financials,” Mathew says.
Blockchain is a form of distributed ledger technology that maintains records of all virtual currency transactions on a network of computers, such as those belonging to banks, merchants, lenders, and auditors. The blockchain network was first introduced to the market in 2008 for bitcoin payments, but today companies are using it for more than just managing cryptocurrency transactions.
Using a central third party, such as a bank, or an offline reconciliation tool, such as a spreadsheet, can add costs, introduce human errors, and delay decision-making. Blockchain avoids those pitfalls by using peer-to-peer protocols—instructions that connect distributed participants in a digital network—to provide a near-real-time and indelible record that’s automatically replicated among each participant.
Today, Biz2Credit is testing Oracle Blockchain Cloud Service to integrate its marketplace with permissioned ERP financial data from all of its merchants’ bank accounts in a public ledger. Using the Oracle Open Banking Platform API to pull merchant financial data into the blockchain app and then onto Biz2Credit’s lending platform, the company can conduct online transactions and confidentially share data in real time with lenders, banks, auditors, and other contracted parties. “We can now see the risk profile of merchants in real time and can make more-informed decisions about their ability to pay,” says Bala. “We can also get permissioned access to merchant financials without having one of our underwriters make a separate request for third-party data from banks, credit bureaus, or the IRS.”
Through the Smart Contracts feature of Oracle Blockchain Cloud Service, Biz2Credit can set borrowing thresholds and adjustable interest rates that will trigger automatically as a merchant’s business fluctuates. This helps merchants get the best deal on their loans and also assures lenders that their minimum payment will be made.
For example, if a borrower starts making more money and is paying the loan back faster, Biz2Credit can automatically give the merchant a break on their interest rates, says company cofounder and CEO Rohit Arora. “In an offline environment, it can’t be done. After a contract is written, the interest rates are locked in.”
Amount in cash advances Biz2Credit has helped originate worldwide
Number of SMBs Biz2Credit has matched with lenders
Smart contracting is particularly beneficial for merchants with seasonal revenue cycles. “The blockchain keeps a ledger of all the receivables and every payment, and then will automatically set up spread payments in the settlement ledger to accommodate revenue spikes and dips,” Arora says.
Biz2Credit is also testing Oracle Blockchain Cloud Service to develop secure channels for lenders to manage their merchant contracts privately. When lenders join Biz2Credit’s marketplace, they can create their own channels on the platform, deploy their own versions of smart contracts, and use their own protocols to connect with other participants.
“It’s like driving on a turnpike where all of the drivers have their own lane,” says Kiran Murty, CTO at Aurablocks, an Oracle partner and blockchain specialty firm that helped implement the Oracle Blockchain Cloud Service pilot at Biz2Credit. Using these channels, lenders benefit from having a secure platform to record and store confidential transactions with the merchants under contract, get better insight into their changing risk portfolios, and understand how best to manage them.
By using Oracle Blockchain Cloud Service to automate verifications, originations, and collections for merchant cash advances, Biz2Credit estimates that it will cut operating expenses by 21 percent, increase its operating margin by 287 basis points, reduce its merchant charge-off rate by 51 basis points, and increase its book of business from US$1 billion to US$1.25 billion.
Despite these benefits, there are serious vulnerabilities that open banking and blockchain APIs can expose. Starting in May 2018, the European Union’s General Data Protection Regulation (GDPR) will enforce consumer data protection laws and monitor companies to ensure that they are securely processing personal data. Because the open banking architectures will give Biz2Credit access to the payment accounts of its merchant customers in the EU, the company is looking to Oracle to help it prepare for the impending legislation and increasing regulatory scrutiny.
“A promise of the Oracle Open Banking Platform with Oracle Blockchain Cloud Service is to help companies that conduct business in the EU to comply with the GDPR,” says Mathew. With real-time data sharing, automated verification, and more-consistent views of data shared between all contracted parties, “the platform not only helps banks and fintechs prepare for the impending legislation; it also fundamentally improves operational efficiencies and reduces friction caused by having to send multiple emails, make phone calls, or reconcile spreadsheets,” says Mathew.
In a market that the Small Business Administration’s Office of Economic Research reports originated nearly US$600 billion in loans for US-based SMBs in 2015, up US$9.2 billion from 2014, open banking and blockchain technologies offer new ways to share financial transaction data automatically, securely, and in a way that’s visible to all the contracted parties.
“We see it, the merchant sees it, the auditor sees it, and the underwriter sees it,” Arora says. With Oracle Blockchain Cloud Service, Arora adds, “we have lower risk. Our lenders have lower risk. And our merchants get a set of flexible payment terms that adjust to the ebbs and flows of their businesses.”
Photography by Paul S. Howell