Okay, well, there's a special kind of marketplace lending that is aimed at small business, especially retailers. Okay, so now we're a small business and not your consumer borrower. So I'm talking here about lending by companies that are called payment aggregators, and the biggest example of this is Square. You've probably seen Square when you go to a coffee shop or other small retailer, they ring you up on this distinctive Square hardware. Well, okay, that Square is one of these, but there are others. And they have expanded on an old idea which is known as a merchant cash advance, okay? And so I'm going to walk through what this is, and through what their special advantage is here. And how this has turned into a big business, both for the payment aggregators and also for the retailers as a big source of funding for the retailers. The payment aggregators like Square, they see every sale you make, every tip a customer makes, every time someone uses a card. And they can also potentially see other payment, even the cash payments that people make in your business, okay, they see all that information. Okay, and so with that level of information about your business, and of course, information about other businesses in your same industry, other businesses in your same neighborhood. They've got tremendous amount of data about your future prospects, and maybe they can also make a judgement about the benefit that you would get from a loan. If they were to loan you 10,000 bucks or whatever, they could see how you could potentially use that to grow your business. So once again, Big Data there, they see every transaction you make, they see all sorts of other transactions in your neighborhood. They see coffee shops just like yours in other towns, and they have all this information that they can see about your business, and that would help them think about potentially making you a loan, okay? And so they can make you a loan, and the loan may take the form of okay, I'll show up right there on your on your hardware, your Square hardware at your business. That okay, we are willing to loan you 10,000 bucks. All right, loan you 10,000 bucks. And if we loan you 10,000 bucks you have to repay us 11,000 bucks, okay? So they can make that offer, and as I say, they can see so much information about you, they can make a pretty advanced credit granting decision of whether this is a good idea. And furthermore, and this is sort of the beauty part from their point of view, they've got a huge advantage over a bank. Right, so let's say a bank loaned you 10,000 bucks, they give you 10,000 bucks and now you have to pay them back 11,000 bucks. Well, of course the bank has to hope that you see it as worth your while to repay the loan. Then once they give you the 10,000 bucks, and now you've got money coming in and you have the bank loan, but you also have your payroll, you can buy more inventory, you can pay the rent. Whatever it is, you have all these expenses, the bank is just one of them. Maybe you pay the bank, maybe you don't, right? So you have some discretion over when you pay the bank and how much, okay? So the bank has to worry about that. So the big advantage of the payment aggregator, such as Square, is that all the money that people are spending at your store goes through them before it gets back to you. Every time someone uses a card they process that payment, and what they can do is they can take their repayment of the loan they made you directly out of your cash flow before you even get it, okay? And so what this does for you is allows you to credibly commit to repay the loan because yeah, they can take it right out of your cash flow. There's no worry there that once you get your money, then you're going to maybe spend it on something else, right? You can credibly commit that you will repay it because hey, they know it because they can take it directly out of your cash flow. So it allows a small retailer to borrow in a way that would be very difficult to borrow from some external source like a bank, right? They're borrowing directly from the from the organization that's processing their payments in the first place. Okay now, as I said, this is this is not by itself a completely new idea, the idea of a merchant cash advance, where the institution processing your payments is taking the repayment directly out of your cash flow. This has been around for years. The sort of special sauce here is this kind of big data approach, that Square can see not just you but people like you elsewhere. People in your neighborhood transacting with sort of the same customer base, making their other sorts of transactions, the dry cleaners, the Bodega, whatever it is. They see that too, and that helps them think about your ability to repay the loan, and the use to which you could put the money from the loan. So this is a tremendous advantage, if you look at, I keep bringing up Square because this is just an interesting example, Square went public just a few years ago. People really weren't talking about Square Capital so much at the time, but Square Capital, that's the division of Square that does this. This has of course taken of now as a big source of their revenue and a big source of funding for retailers in the country now. And it's also, as I said, called marketplace lending here, because not only are they making these loans. But also they're providing this as an opportunity to institutional investors to front the cash that they then loan, right? So a lot of the cash they loan is not really their own cash, it is posted by the institutional investors who want to essentially buy a piece of this action. They want to be making these loans to these retailers. They like the story and so they supply the capital that then gets loaned out. So to summarize that, basically, this is the way that small business is borrowing at rates that take advantage of the lenders' ability to number one, make a very informed credit granting decision. Based not only on the finances of this company but companies like them. And then number two, takes advantage of this ability to take the cash flow directly out of the company's revenues and pay themselves off directly. And that allows this small retailer, the small bodega, the dry cleaner, whatever it is, to borrow on terms that probably are a lot better than they would get if they were to go to an external source like a bank.
