P2Binvestor ("P2Bi") is an online marketplace lender that provides asset-based lines of credit of $1 million or more. Typically, its borrowers are rapidly growing consumer products and professional services companies that can't yet access bank credit. Through the application of technology, P2Bi has democratized access to this kind of debt financing by making it available to companies having annual revenues as low as $1 million. I spoke with Krista Morgan, co-founder and CEO, about what makes P2Bi different.

Growth Capital for Not-yet Bankable Companies

Initially, Krista thought P2Bi would be providing $50,000 to $100,000 loans to small businesses. However, she and her colleagues discovered a better fit with companies in the $1 million to $10 million revenue range.

A classic case is a small, growing, but as yet unprofitable, specialty food company. It might be completing a successful, regional trial with a national retail customer such as Whole Foods. A successful trial can often lead to a national roll-out. However, to fulfill the inventory requirements of a national program requires financing. Bank debt is not in the cards for an unprofitable business. Even if an SBA-backed loan is feasible, it usually takes months to put into place.

That's where P2Binvestor fits in. They can underwrite a revolving line of $1 million or more backed by the receivables from creditworthy customers like Whole Foods. Underwriting is a matter of a few days or weeks, depending on the borrower's preparedness.

As the borrower grows and becomes profitable, it will transition to lower-cost bank financing. Krista says that a typical borrower is with P2Bi for up to three years, during which time its line of credit might grow tenfold.

Asset-based Lenders View the World Differently

Most lenders look to the free cash flow generated by the borrower in the normal course of business to service debt. Such "cash flow lenders" view collateral as a secondary source of repayment. Consequently, cash flow lenders are keenly interested in the debt capacity and character of the borrower.

Asset-based lenders view the world a little differently. Sure, the creditworthiness of the borrower matters. However, true asset-based lenders are at least as sensitive to the collectibility of the borrower's accounts receivable. To the extent the borrower sells to large, creditworthy customers such as national retail chains, an asset-based lender might be willing to overlook some uncertainty about the borrower's future cash flow. In other words, collectible receivables and readily liquidated inventory can overcome uncertainties regarding a borrower's free cash flow in the eyes of an asset-based lender.

Asset-based Loans Are Not New

Asset-based loans have been around a long time. Early in my career, I worked in the "leveraged capital" group of a very large, global bank. We made competitively priced loans of $50 million or more to established companies having revenues of at least $100 million.

In many cases, my bank would lead a "syndicate." That is, my employer would originate, negotiate, and manage the credit. Other banks would "buy" pieces of the loan. Syndication is a way to manage loan portfolio diversification, boost profits, and develop differentiating expertise through the origination of more loans than would otherwise be possible.

Quite frequently, our group would make asset-based loans that couldn't be underwritten per the standards of the "normal" bank. Usually, this was due to the leverage of the borrower. Oftentimes,