Counting Bills

Building a business around online advertising is hard enough without having to combat the cashflow issues created by lengthy payment terms. A survey by industry regulatory body IAB indicates that nearly 80 percent of digital advertising invoices take 60 days or longer to pay. Yes it’s great that Pepsi and Ford want to advertise on your site, or purchase inventory through your ad exchange, but the fact that they want to pay you “net-90” – or after 90 days – could seriously hamper your growth.

FastPay, a technology-driven “anti-bank” in founder and CEO Jed Simon’s words, is helping combat these growth impediments by providing commercial loans against digital advertising receivables – aka factoring. Since launching in 2010, the company has lent out more than $100 million of this “working capital gap financing” to over 100 publishers, ad-tech companies, and other digital media businesses. Most impressively, it’s managed to do so without a single default to date.

“We’ve had a few ‘situations,’” founder and CEO Jed Simon says. (Pun intended.) “Nothing’s perfect. We have had a few disputes here and there between publishers and advertisers, but nothing we couldn’t work out. We’ve been pretty conservative, and we’ve certainly turned down a few deals that could have been problematic in hindsight.”

Three quarters of FastPay’s lifetime lending activity has occurred in the last seven months, with the company tripling its lifetime revenues since securing its own $25 million of commercial financing in June 2012 from Wells Fargo and SF Capital Group. Because the company offers short term loans, its able to “turn” this capital several times per year, leading to the high ratio of total lending activity to capital availability.

The company has since increased its Wells Fargo senior credit facility by an undisclosed amount since last reported, according to Simon, and has raised a separate $10 million with less restrictive covenants into a separate operating silo reserved for developing new products and business initiatives.

FastPay typically lends up to $5 million per borrower, based largely on the strength of the payable vendor (e.g. Pepsi). Proprietary algorithms assess risk and determine credit-worthiness of each applicant in a matter of hours, rather than days. Borrowers pay a flat monthly fee of 1 to 2.5 percent based on risk and vendors remit payment to a bank “lockbox” that passes through the post-fee balance to the business owner.

When evaluating market opportunities, FastPay targets verticals where there is significant growth, the presence of large brand advertisers, and a deficiency of growth capital. The company has expanded in recent months beyond its initial targets of publishers and ad-tech companies into several new verticals, including Facebook PMDs (Preferred Marketing Developers) and premium YouTube channels.

The company signed up six PMDs in the last three months, including former Google mobile ad product director Dilip Venkatachari’s Compass Labs, and two YouTube networks, according to Simon. FastPay also recently completed its first international transaction through its new, less restrictive financing vehicle. Despite its Los Angeles roots, the alternative lender’s growth has been fairly diverse geographically. The company’s three largest customers are in Atlanta, Ohio, and New York respectively, the CEO says.

Simon’s goal when founding FastPay was to allow fellow entrepreneurs to access capital without sacrificing ownership and control. He argues that his company’s credit lines have already enabled clients to expand operations and favorably negotiate multi-million dollar acquisitions in ways that would otherwise have been unachievable.

EQAL founding executive and FastPay client Paras P. Maniar had the following to say about the service:

“Debt financing options historically available to startups are onerous and riddled with fees, covenants, equity-kickers, and personal guarantees. FastPay was unlike any financial partnership I’d previously encountered. Working with them enabled our company to take a large line of capital with nothing more than a reasonable interest rate. As a result we buttressed our cash flow – the lifeblood of any growth business – and strengthened our position when negotiating our recent acquisition by Everyday Health.”

In keeping up with its rapidly growing lending activity, FastPay’s team has swelled from four at the time of its June financing to 20 today, with the bulk of the additions occurring in sales and operations roles. Simon tells me that he plans to continue directing as many resources as possible toward capturing market share and servicing clients. The next step will likely be to open an east coast office.

Going forward, the company hopes to implement several channel relationships which are currently in discussions. While Simon declined to specify exactly what this means, he did indicate that they would likely lead to some form of “one click payment scenario.”

There are other participants in the alternative financing space, such as Sand Hill Finance among others. But few if any display the focus or expertise in the digital advertising space of FastPay. Regardless, billions of dollars of receivables flow through the digital realm each year, and financing options are massively underserved. There’s arguably room for several winners to emerge, and greater competition would at least lessen the need for FastPay to educate its potential customers on the model.

FastPay still has plenty of room to grow, and many entrepreneurs will be eager to accept its capital. It’s biggest risk is likely growing faster than it can maintain its diligence and conservative approach. Every minute that the company can celebrate having zero defaults in its history is a small victory. But given the laws of gravity that govern business and finance, this will not last forever. Further, as FastPay expands into new categories like international lending and alternative platforms like social and YouTube, risks are likely to increase in parallel.

“There’s a general lack of financial literacy among most entrepreneurs,” Simon says. “The controller or CFO is typically one of the last hires made by startups. It’s orders of magnitude easier to sell company for $25 million than it is for $50 million than it is for $100 million. If we can help founders keep more equity by solving their short term capital needs with debt, each of these outcomes becomes significantly more appealing.”