Garnet Capital Advisors Blog

July 21, 2015

New marketplace lending angle uses loyalty as collateral

Think about your favorite mom-and-pop coffee shop - you go there at least five days week, spend a couple bucks and then head to work. Odds are, you've never actually thought about investing in the small business, but that is almost what you are already doing.

Extrapolating your daily purchases, you could spend upward of $400 or $500 a year at the coffee shop. And this type of cash is exactly what a new startup - ZipCap - is banking on with its version of marketplace lending. Instead of searching for standard commercial loans for small businesses, your neighborhood mom-and-pop stop can turn to ZipCap for the capital they'd otherwise be lacking, all while using your consumer loyalty as collateral.

ZipCap can be opportunity for small businesses
This niche market exists because of the difficulty many small businesses have acquiring loans. Tiny companies are often considered too risky for lenders, while unprofitable businesses are out of luck regardless.

That doesn't really matter for ZipCap, however, making this startup a lifeline for small businesses. That is because ZipCap isn't worried about traditional collateral. It uses consumer loyalty to create what it calls "loyalty capital."

ZipCap's small businesses ask their customers to sign up for the ZipCap "Inner Circle." Once inside, customers agree to pledge a set amount of money over a set period of time, such as a year. All those funds are then added up and used as collateral for a ZipCap loan. According to The New York Times, the initial cost for small-business owners is either $99 a month or 2.5 percent of their Inner Circle transactions, depending on which one is the lowest.

"By using customer loyalty as collateral and an asset, we're creating an accounts receivable stream for the kinds of businesses that otherwise have none," Evan Malter, ZipCap's founder and CEO, told The New York Times.

Loyalty capital still has bumps in the road
Using consumer loyalty as a way to underwrite small-business loans is an interesting idea. Of course, it has its fair share of pros and cons.

Deborah Lee, business expert and branding specialist, told the Guardian that customer loyalty is incredibly valuable to any business.

"The importance of customer loyalty can't be overestimated, especially for small businesses or those just starting out," she stated. "Without it, your word-of-mouth marketing will be non-existent and you'll struggle to establish a customer base, which is key to forecasting growth and committing to goals."

Robert Foster, a veteran of the impact investing industry and a board member of the Social Venture Network, told The New York Times that the onus is on ZipCap to prove that loyalty will be enough to keep these loans afloat.

"This is a challenging pool of applicants to lend to," Foster explained. "You're essentially an unsecured creditor. ZipCap believes that social pressure is enough to keep people doing the right thing, to keep customers fulfilling their pledges and borrowers paying back their loans. The $1 million question for me is: Is that glue really strong enough?"

Right now, ZipCap has found success with a handful of small businesses. However, those same companies are finding that not every customer who pledges stays committed to the goal, and that keeps a level of risk in this version of marketplace lending.