Two friends leverage big data to build a new kind of financing platform. Part of a Hustle series profiling pandemic-born businesses.
Stats at a glance: Founders: Jared Shulman and Jerry Shu Employees: 5 full time, 4 part time Starting date: August 2020 Cost to launch: $100k Initial funding methods: Personal savings 2021 annual revenue: $3m 2022 projection: $30m
Lendica founders Jerry Shu (left) and Jared Shulman (center left) with their senior engineer Keith Baghi and VP of UX Shiyi Peng. Image courtesy of Lendica.
After the pandemic roiled millions of businesses in spring 2020, banks started tightening their lending standards as nationwide shutdowns induced bearish economic outlooks. That’s when Jared Shulman, 30, and Jerry Shu, 31, capitalized on the chance to build a next-generation lender.
“The future business leaders of the country, of the world, they’re not going into a bank to handle their financial services,” Shulman told The Hustle in a recent interview. While working at a private credit hedge fund, he started knocking around ideas with longtime friend Shu, a former JPMorgan quant researcher and crypto trading entrepreneur.
With the financial sector in disarray, Shu saw an opportunity for new entrants to break in while incumbents struggled to lend in the covid economy. Looking to leverage the wealth of data generated by modern businesses, the duo began building Lendica, which integrates its own AI technology with enterprise SaaS platforms, then uses the data to underwrite business loans.
Unlike traditional banks, Lendica can access detailed and nuanced information such as up-to-the-minute transaction history or the proportion of orders coming from repeat customers, since it pulls from software that controls inventory, invoicing, and more. Using the big data approach allows financing approvals to come through in minutes, and Lendica’s algorithm can also factor in qualitative elements, such as the diligence and creditworthiness of the owner.
The firm aims to focus on industries where there’s an abundance of data but scarcity of capital. One example is businesses in the supply chain, where it’s standard for buyers to have up to 90 days to pay the suppliers after the products are delivered.
Lendica’s programs can front cash to manufacturers based on their invoices, allowing them to keep up or expand production before the owed payments come in. Other potential uses include the hospitality industry, where Lendica can finance based on reservation and delivery data.
Lendica allows businesses to borrow based on their invoices. Image courtesy of Lendica.
After making its inaugural loan in January 2021, Lendica made 50 loans in its 1st year with an average of $300k per business, with the aim of funding 500 more in 2022. The fintech’s growth coincided with an unprecedented boom in the industry — the financial services sector was the leading recipient of venture funding in 2021 with $134B invested — and increasing interest from tech giants to tap into the small business lending space.
Among the major players:
Square launched Square Banking in July 2021, offering business checking and savings accounts combined with its preexisting business loan products; it originated more than $1B in loans in the 1st half of 2021.
Shopify made over $670m in loans over the same period.
Amazon reported $1B in outstanding loans to its platform’s sellers at the end of 2021.
And just this month, DoorDash started a financing arm to offer cash advances to restaurants in its network.
Traditional lenders, on the other hand, can have onerous and lengthy application requirements that are less favorable to new ventures with unproven financials. The 3 top SBA lenders collectively doled out less than $700m in loans in 2021, according to the Small Business Administration.
While industry titans have enviable access to potential customers and their data, there are slews of other SaaS companies that want in on the action — yet creating and maintaining their own financing infrastructure can be cost-prohibitive and time-consuming. “There is a lot of care and consideration that goes into building the front-end display to customers and the back-end underwriting, pricing, monitoring, servicing and reporting,” explains Shulman.
The Cambridge, Massachusetts-based fintech has teamed up with 15 SaaS companies and projects to have 40 software partners by the end of the year. SaaS firms that allow Lendica to integrate into its platforms receive a share of the loan revenue, while working with established name brands gives Lendica the credibility it needs with borrowers.
“For even a big partnership, we start with something really small. And as it goes on you would add more complexity, add different partnership programs. And then because of the trust you got before, that’s easier to scale,” Shu says of their approach.
After funding the 1st few loans with $100k in savings from Shulman and Shu, Lendica raised $500k in a seed round, and is in the process of raising a 2nd $3m round at a $27m valuation. The startup, which is already modestly profitable, is also closing in on a $10m credit line to expand its lending capacity.
In a space ripe with new startups, from peer-to-peer lenders to online banks, Lendica is looking to forge ahead by exploring untapped markets. One area they’re looking into is small cattle farms, where ranch management software can provide data to help finance loans based on future cattle sales.
“If we can put a ding in the small business banking universe, we’ll feel like we’ve done something right,” concludes Shulman.