Fresh Funding is a New York-based provider of financing to small and medium-sized businesses (SMBs) across the U.S. Since 2016, Fresh Funding has provided more than $15 million in capital solutions, leveraging a proprietary data-driven underwriting platform and a funding and servicing process with robust risk controls.
How has Fresh Funding been able to help brick and mortar small businesses, which were strongly impacted by the pandemic, navigate through this challenging period?
Small businesses were clearly impacted the most when COVID-19 hit the US. As a funder, the immediate impact we felt was a bit counter intuitive. At the time, we expected a surge in demand but instead initially saw a complete stop. Ultimately, demand returned to prior levels and even increased, but the type of requests we received were often not a good fit for the revenue-based funding we offered.
We are proud that, throughout this period, we never actually stopped funding. We believed that if we ceased operation, even temporarily like some other funders, we were not fulfilling our goal and couldn’t justify our existence as an alternative funder at all. It took a lot of effort: we had to stay very close to the market before we found the way to still offer our revenue-based financing to small businesses, in a way that would really help them sustain or even grow in an optimal way while still managing our own risk.
How did that experience change Fresh Funding and what did you learn?
The risk was real. We were a very small, bootstrapped company at the time. We were not in the position to offer PPP or any type of government-backed products, and we had no safety nets. In retrospect, that experience really pushed forward the quality of our underwriting and the way we use data analysis and make decisions backed by data and technology every day.
At the time, our data clearly showed us more than a few angles we could take that would really make an impact. We found a way to help our customers while also taking on less risk than the general, intuitively perceived risk for these customers. Today, as we again face macroeconomic challenges and industry wide uncertainty, we largely bank on the tools and disciplined approach to risk management that we developed and honed during COVID-19.
What are the challenges some small and medium-sized businesses face as financial institutions have reduced access to financing? How is Fresh Funding helping?
Banks are notoriously not good at meeting the needs of small businesses when it comes to access to adequate funding. At Fresh Funding, our mission is to never let an inherently good business fail just because of temporary working capital gaps.
We saw this first hand when we started out. As we were looking for liquidity to support the growth of our funding operation and portfolio, we talked with multiple financial institutions. We felt the same pain our customers feel when they try to solve their working capital gaps at the bank. It is always surprising to learn how prevalent the misconceptions of US small business credit are.
It isn’t just about the misconception of risk, though. It’s also about agility and the need to quickly secure a relatively small amount of funding. Banks are not cut out for that, but we are. Our entire funding process, from application receipt to closing to servicing an advance, is built around the principles of adjusting the flow to the size of the deal and the level of comfort we can achieve in a short period of time – minutes, in some cases. Our technology, systems, underwriting, and funding workflows are all optimized for speed and flexibility. We continually look to push those boundaries. Recently we adjusted our credit guidelines to allow even small deals – which we call “nano deals” – to take place near our regular, more traditional funding sizes. In this economy, we believe this subset of deals presents strong opportunities. Since they typically do not come with long durations, they allow for better portfolio diversification and utilization of our existing liquidity.
How does Fresh Funding use technology and data sources in underwriting and due diligence?
From the get go, we have taken a data-enabled, technology-driven approach to underwriting and use a variety of tools to achieve that. We built and continuously improve our own LMS / LOS (loan management and origination systems). We’ve integrated various data sources and technologies to that stack, including robust document classification and data extraction capabilities (in partnership with innovative companies like Ocrolus); PII validation and onboarding tools; data enrichment tools; instant bank verification (through Plaid); business and personal credit checks (through Experian); background checks; Secretary of State / business search APIs, and more. We constantly research new technologies and tools to couple with our internal data processing and scoring layers in an effort to replace existing tools with better ones and stay ahead of ever-changing underwriting and compliance challenges.
What industries do you target in constructing your portfolio?
Favorable industries vary over time. Some funders have developed a specific preference for certain industries, such as medical. We have taken the opposite approach. While we make sure to benchmark underwriting findings against industry peers, we deliberately stay away from industry specialization and look at specific opportunities on their own merits. So, during COVID-19, we did a lot of deals in the logistics space. Although trucking is traditionally considered one of the riskiest industries even in normal times, we found a segment that was demonstrating real counter-cyclical behavior. These days, we are dealing with business services, manufacturing companies, and certain medical businesses.
For a funder, nothing is better than having a customer return for a renewal and seeing their revenue grow 2-3x from each renewal to the next. We didn’t make that happen, they did. But our funding supported that growth, sustaining it when no one else would step up.
What are your core risk management principles for underwriting, portfolio construction, and monitoring?
Fundamental analysis of the underlying business is at our core, and we score quality against various measurable attributes with the goal of ensuring that a good business should get the funding it needs. In addition to looking at the individual business, we actively monitor diversification. We want to make sure there is no excess concentration or exposure to a specific business, group of businesses or a specific owner. We also monitor for over funding in certain geographies, industries or types of businesses (e.g., discretionary vs. non discretionary spending businesses). That way, in the event of an economic recession or other COVID-19, we know that US small businesses performance will be correlated but we are prepared against contingencies.
Finally, risk we cannot diversify away or remove through rigorous underwriting is mitigated using disciplined and appropriate commercial terms. That is how we ultimately determine the size, term, and rates in our offers and preapprovals. Our industry is extremely competitive: often, there will be a player out there willing to do anything to win over a customer. While we are aware of these competitive pressures, we are committed to staying disciplined on what we are willing to offer.
How does Fresh Funding differentiate itself from other merchant cash advance (MCA) companies in your ability to service customers?
We want everyone who deals with us to know they’re in trusted hands. In our mind, MCA (and revenue-based funding in general) needs to be a premium product. Yes, on average it is going to be more expensive than a bank loan, but we believe customers deserve white glove treatment – from onboarding through the actual funding and throughout post funding service. That philosophy is instilled in every one of our employees from day one.
The same goes for our relationships with our ISO partners, who work very hard to provide us with funding opportunities and deserve the most professional, fast, and accurate service we can provide.
Feedback is that we have very good, reliable customer service. Customers and partners may not always like the answer we have for them, but they know they can rely on the thoughtfulness and thoroughness of our underwriters, the quality of the systems and technology they have at their disposal, and our uncompromising commitment to them.
Since joining the Percent platform in December 2021, how has Fresh Funding benefitted?
Tremendously. Trying to raise money from investors who are not familiar with the industry has proven to be a fairly frustrating experience. We needed a solution that would help us monetize our existing portfolio and use it as a collateral without asking us to inject additional equity into the company, which we weren’t in a position to do at that time. More than anything else, we needed an ‘evergreen’ solution, so that we could take additional funds as needed, when needed, but in relatively small amounts. The team at Percent came at the right time for our growth. They possess deep industry knowledge and their funding program, through our note, was tailored exactly to what we needed.
Today, Percent is the main source of capital for Fresh Funding and we believe this will continue to be the case. Furthermore, the internal checks and audits Percent conducts are a welcome added benefit. We have learned a lot from the methodologies Percent uses to monitor our portfolio and we now use those same methodologies internally. In fact, there is no difference between the external reporting we provide to Percent on an ongoing basis and our internal monitoring of our own portfolio.
Although we have received offers for larger investment amounts, not necessarily backed by our existing portfolio size but based on future growth plans, we prefer the steady growth we experience now through Percent. We know it’s sustainable and backed by our actual performance. For a funder who is in it for the long haul, there is no better way to do this.
From a growth perspective, what developments are you looking forward to during the next 12 months?
We have an exciting year ahead of us. The economic climate presents some challenges, but there are also opportunities. We want to strengthen our regulatory infrastructure and possibly expand our product suite beyond MCA. We also plan to hone our funding infrastructure to support any kind of incremental growth coming from our business development side. Percent plays an important role here.
Before Percent, liquidity had often been a challenge and it was difficult at times to justify large investments in business development, technology, compliance, and back end administration. Thanks to the partnership with Percent, this is no longer the case. Over the next 12 months, we intend to invest heavily in our technology and people in order to perfect our funding process and bring it to a close to zero friction and latency state.