Business Lines Of Credit For Startups – When Henrique Dubugras and Pedro Franceschi joined the YC W17 batch with an idea for a VR startup, they quickly ran into a problem. They applied for a business credit card to help fund software and other expenses and were denied. Business credit is traditionally underwritten based on founders’ FICO scores. As international founders with less than a month of credit history, their chances of getting approved were slim to none despite having $125,000 in the bank.
It wasn’t just them. They found that even though founders of early startups had access to high-fidelity payment products like Stripe (YC S09) from the start, it was a horrible experience for anyone to access basic cash management and credit products. Even with $125,000 from YC and $1–2 million in venture capital, a startup’s credit limit will probably still be $20,000 from a sitting creditor — which is nowhere near enough to cover software, marketing, and other expenses. Cards are especially a must for young businesses, as major suppliers don’t often accept ACH and other forms of alternative payment from early startups. In practice, this leads founders to use their personal credit cards for SaaS subscriptions or digital marketing and regularly file fees.
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Stripe also set a great example in how they transformed the internet’s payment infrastructure. The launch of Stripe in 2009 made it possible for startups to easily collect payments online through developer-friendly APIs. Over time, Stripe has expanded to support more business models (e.g. e-commerce, SaaS, marketplaces) and industries.
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While products like Stripe and Square have dramatically pushed business-to-consumer (B2C) transactions to credit cards, business-to-business (B2B) card penetration has remained stubbornly low. The US B2B payments market is three times the size of the B2C market, but the B2B digital payments penetration rate is 36%, half the size of B2C (67%). B2B credit card adoption is extremely low, representing only 4% of the market.
The extremely low penetration of credit cards in the B2B space is a historical relic of the industry. Checks remain the most popular payment channel because they are not only simple and virtually free to use, but also the longest lasting. ACH followed suit in the 1970s and now makes up half of the payment volume as checks (mostly in recurring payments such as payroll and invoicing).
Meanwhile, card adoption is just 4%, not because of lack of demand, but because of significant friction in product accessibility, onboarding, and usability. Most banks and card providers ask for excessive documentation, take 3 to 5 days to onboard customers, and demand a personal guarantee from company founders and owners. Even then, the credit limits they offer are minimal, as they are underwritten based on the personal credit history of the founder and not the health of the company. And another hurdle: The walled garden of most Enterprise Resource Planning (ERP) systems makes it difficult for new payment solutions to easily integrate with a company’s accounting software, increasing administrative costs for reconciliations and increasing the overall cost of implementation. of a new payment system become incredible. high for small businesses.
To address this massively undervalued market opportunity (not to mention a personal pain point), Henrique and Pedro turned around and built Brex. They had the advantage of having previously founded a Stripe-like payments company as teenagers in Brazil. They had scaled that company to $1 billion in annual payment volume and then sold it. Because they already had an understanding of the initial map infrastructure needed to build Brex, they were able to act quickly and launch their first product within six months.
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The original Brex product was a simple 30-day charge card for startups with credit limits based on cash balance. The value proposition was clear: Founders didn’t have to provide a personal guarantee, it took less than 24 hours to get approved, and companies had access to 10-20x higher credit limits because underwriting was based on cash balance. They further differentiated the product with several intuitive features. Brex gave startup founders daily insight into the month’s cumulative spend (versus existing offerings that only offered month-end reconciliation). They made it 10x easier to submit expenses: whenever an employee used their Brex Card to pay for something, they immediately got a text message that allowed them to immediately send the receipt (instead of having to keep receipts and have them all start due at the end of the month). Finally, they designed a rewards program for startups, offering customers things like rewards on SaaS spend and discounts on AWS and Zoom.
Brex’s product-market fit was immediate and the product has spread like wildfire among venture-backed startups. Brex grew from 100 to 1,000 customers within five months of its launch. In the less than three years since launch, they have scaled to over 20,000 customers (including 60% of all YC businesses).
Henrique and Pedro’s vision for Brex is not just to issue credit cards to startups, but to become the financial operating system for growing companies. We believe Brex’s experience represents the next major shift in global B2B financial transactions.
Brex understood early on that removing the friction from financial products could meaningfully differentiate them from the status quo. Brex’s initial insight was simple: “You should be able to sign up for a credit card and other financial services as easily as you can set up an email address — in minutes, all online.” Once they started onboarding customers, Brex found that the demand for seamless financing was even greater than they had originally thought.
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To provide the modern and seamless service they envisioned, Brex built a risk assessment system that was fundamentally different from traditional credit card acceptance. They removed the back and forth paper based traditional KYC
Processes and built systems that could collect and verify critical business information (such as beneficial ownership) in seconds. They then built their own ledger that used real-time cash, operational, and transactional data to underwrite customers up to credit limits with multiple levels of authorization. Incumbent insurers rely on point-in-time data and need to build trust in customers over time. Brex’s digital approach enabled them to immediately onboard customers with 10-20x higher credit limits than the incumbents could offer. These methods have proven to be very efficient: Brex’s credit losses have been lower than those of Amex and Silicon Valley Bank, even factoring in the impact of COVID-19.
The demand for hassle-free financial services soon spread far beyond venture-backed startups. Each month, more than 10,000 companies across the country signed up. But because their acceptance system was built for tech startups, Brex had turned down more than 80% of those prospects. At the end of 2020, Brex decided to redesign their system to serve more customer segments.
With the average business in mind, Brex launched a new risk system that allowed any legitimate business to instantly subscribe to a cash management account and a same-day payment card (a debit card-like product). This change allowed Brex to increase the number of new monthly customers tenfold and to immediately maintain same-day approvals for 80% of those customers. In the first quarter of 2021, Brex attracted more customers than in the company’s entire history and. Today, more than 70% of new customers are traditional small and medium-sized businesses.
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The next step for Brex was to launch additional financial and software products in addition to credit cards. Last year, they launched a service that transformed the trajectory of their platform: Brex Cash. Brex Cash was envisioned as a bank account replacement product that would allow Brex to serve businesses before they become eligible for credit. It was also a way for customers to send checks, ACH, and electronic payments to suppliers and third parties that didn’t accept credit cards (remember, 96% of B2B payments in the US are non-card payments).
But Brex Cash is not just an add-on product. It is a deeply integrated solution that reimagines and streamlines workflows for various forms of payment.
Brex designed Brex Cash to be the center of a company’s financial operations, rather than an account used solely for financial services. This meant that the product had to be intuitive and designed for everyday use. Brex removed all fees on ACH and wires, improved payment speed and user flows (Brex’s payment initiation is 40-50x faster than competitors), and built-in tools beyond financial services. For example, they have dramatically reduced clients’ accounting workload by integrating Cash into third-party accounting systems. These integrations have enabled SMBs like OP2 to save the 20-30 hours per week they used to spend downloading bank statements and manually reconciling.
Today, Brex has more than 10,000 customers ranging from small enterprise-backed startups and traditional SMEs to large growth companies using both Brex Cash and the Brex Card. In our view, Cash is the core product that transforms Brex from a card issuer to an all-in-one platform for financial operations.
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As Brex has scaled, so have their customers. Many of their early startup clients have grown into large organizations whose needs have evolved beyond simple credit cards. To keep up with the customers, Brex quickly moved from a team-oriented product to an enterprise product. They have made department and category level tracking tools true leadership
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