Finley Helps Startups Follow Banks’ Rules About Borrowing Money

Finley is a fintech startup that automates compliance for startups that borrow money. It was founded in 2021 and has already raised $3 million in a funding round led by Bain Capital. That’s a large seed round and it indicates that there’s a lot of demand for a service like this. The Finley founder Jeremy Tsui originally worked at Goldman Sachs and he learned why compliance was a major issue for both startups and banks while working at the investment bank.

Many startups prefer to take out loans from banks if they can get them. Lenders expect lower returns on investment than equity investors. And if a startup takes out a loan, it avoids selling stock that gives a third party investor control over its business. So borrowing money is not just about reducing financing costs. There are multiple reasons to use debt capital to finance a startup. The catch is that banks want to make sure that the startup is following the rules for the loan.

If the startup takes out a loan from a bank, it must periodically report financial information to the bank. That’s a big distraction for a technology company that’s focused on developing new software. I’ve seen several startups that only hire engineers during their first few years. Sometimes they don’t even hire a full-time chief financial officer (CFO) until they’re ready to go public. So they may not even have accountants or bookkeepers on their staff who know how to create the reports that the banks want.

So what Finley has done is that it has automated the loan reporting process. Finley’s app is a dashboard for startups that borrow money. It automatically generates the reports that the startup sends to the bank, and it also gathers the information the startup needs if it needs to request more money from the bank. With this app in place, the startup will be less likely to accidentally violate the terms of the loan covenant, which could cause the bank to charge it fees or penalties.

Here is why I think this startup has a lot of potential. I have the SEO tool Ahrefs so I can see keyword rankings for startups. Finley is ranking for many keywords related to financial covenants and debt capital. It has articles on its website that explain these terms and provide examples of why they matter to startups. One of the articles that’s generating the most traffic is an article about forward flow agreements.

If you’re familiar with peer-to-peer financing platforms you might have seen similar deals already. Under a forward flow agreement, a bank will agree to buy any loan that the platform originates that meets its lending standards. When a borrower submits a qualifying loan application to the platform, the bank automatically agrees to fund the loan and the loan request doesn’t get sent to the marketplace. Another example of forward flow agreements are the deals that buy now, pay later companies like Affirm have with banks.

When a shopper selects buy now, pay later as their payment option when they buy clothing at the mall, they’re actually taking out a short-term loan from the BNPL app. But many BNPL startups aren’t banks themselves. They’re fintechs that primarily earn money by charging fees to merchants. Interest isn’t their main source of income and many BNPL loans are zero-interest anyway. So these startups don’t want to have these loans on their books. And forward flow agreements solve this problem. With these contracts in place, a BNPL provider can immediately resell the loan to a bank like Cross River Bank as long as that loan meets the bank’s lending standards.

The BNPL app can also loan money to customers directly instead of reselling the loans. For example, Goldman Sachs might give the BNPL app access to a credit facility. This facility is separate from the other loans that the startup takes out to finance its operations and there are different rules for using it to borrow money. The startup can only use the credit facility to make BNPL loans to shoppers and it can’t use it to take out loans for other business expenses. An investment bank like Goldman Sachs might even give a startup debt capital and a credit facility, so the startup will have to manage two pools of money from the same bank. And the bank will check up on the startup to make sure that it’s following the rules, which is where Finley comes in.

One reason why I think Finley will be successful is that it’s already succeeding at content marketing. It’s ranking within the top few results for many niche terms related to startup loans. Many of these keywords have significant traffic and very low competition, and they’re not being targeted by PPC marketers either. Wise was in a similar situation. The money transfer app posted lots of detailed articles explaining how international money transfers work and it gained a lot of traction that way. And Finley is a relatively new company, so this performance is even more impressive.

The other reason why I think this fintech app will succeed is that it provides a service that other fintechs need. As I’ve mentioned in previous articles, most fintech apps don’t actually have banking licenses. If they offer you a loan, it might really be a loan from a bank like Cross River, Celtic Bank, or Goldman Sachs. And these banks will want to see information from the fintech app about the loans they’re buying. Finley can help these fintechs provide that information and that would be much more convenient for these startups than building their own reporting systems.

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