Funding the Buy Now Pay Later Sector

Posted on
3rd December 2020
By Travis Miller

Funding the Buy Now Pay Later Sector

BNLP sector in Australia (By Travis Miller, 3rd December 2020)

The Buy Now Pay Later (BNPL) sector in Australia is generating a lot of attention, largely as a result of the success of Afterpay, and to a lesser extent ZipMoney, as well as the increasingly long list of “me too” style initial public offerings (IPOs) seen since COVID-19.

Equity buyers are attracted to what appears to be a “free”, although volatile ride into a hot sector. Investors are achieving multiples of their invested amounts through a simple buy and hold strategy, with minimal differentiation in performance amongst names.

What is not always understood is the long journey that it takes to an IPO. The journey of the BNPL company is difficult with a constant pursuit of funding, technology, business scale and ultimately profitability. In this article, we focus on the journey of the BNPL funding model, and the struggle from start-up to the high-five funding moments and the ultimate IPO.


Like any start-up, the early stages are pretty straight forward.  You simply beg, spin and sell to family, friends and associates looking for seed equity utilising a valuation that seems rather arbitrary.  If you are lucky, and you can convince a venture capital type firm or professional investor that you have the next greatest business plan, and you are happy to give away a significant portion of your company, then you may get some non-associated equity funding.  Often founders use their own money and offer sweat equity to build out the team (although many still have day jobs).

This is where it starts, with some basic technology you progress towards offering your first loans, sourced by word of mouth or social channels, largely funded by “beg equity”.

Still Start-up

Early equity capital runs out quite quickly, and ideally that is not because you wrote bad loans, but purely because the scale of your book has grown and you need more capital to keep growing.  At this point companies often try to fund themselves using “peer to peer” funding.  In my experience there is not a material “peer to peer” market in Australia as wholesale financial markets fund most BNPL entities.

Companies will often circle back to family, friends and associates for an expensive line of credit to fund loans.  Or to private lenders who will typically want warrants (they take part of the company if you get it right), as debt at this stage exhibits a lot of characteristics closer to equity than debt.

If this line of credit can be provided you simply write more loans.  If you don’t get the line of credit it is back to the equity well for more “beg equity”.  Either way, the capital is required, regardless of price, to write more loans to grow.  If the book is not growing there is no next step.

Scale Up

At this point you have built the early foundations of a business.  The loan book is growing, and the performance of your loan book (losses and arrears) are within reasonable parameters given the target market and business strategy.

You have now exhausted your seed equity through funding the loan book and the business operations, the line of credit is now fully deployed to fund loans.  At this point you require more equity.

Having reached this point, with the amazing niche you are targeting and the team you have built, you can also see the net interest margin (NIM) that your loan book will generate in the future.  All this sets you up for a material step-up in the company’s valuation.

New equity helps accelerate your growth and provides the fuel (we call it subordination) for a small segregated debt warehouse funded through iPartners or a similar funder.

Still Scale Up

BNPL companies always need more capital and it is probably time for more equity. If your lending book continues to perform and as your track record gets longer there should be a commensurate increase in your valuation.  The next step  is usually a medium size, segregated warehouse, maybe you expand to a multi tranche warehouse to lower your cost of funding.

At this stage larger institutional providers of debt capital will be starting to take notice and it is time to start engaging     with them. You need to start meeting investors to get your name on their radar as they hold the key to significantly lower warehouse funding costs and the increase in profitability that flows on from that.


The position that you find your business in now gives you the capacity to be more creative with your capital structure.  For example, can you raise other forms of debt rather than raising more equity?  What does your profitability look like?   If there is positive NIM available and flowing back from the warehouse(s), perhaps it is time for some type of senior    loan / NIM-capture style of funding and / or, some type of hybrid equity funding like a convertible bond.

Either way, whether its equity, NIM secured debt, or a convertible bond it is largely needed as subordination for a larger warehouse through iPartners or a similar funder.

Still Growing

At this point things start to get serious. Your business is growing and performing. Larger institutional investors and smaller banks are now engaged and thinking you could be the next big thing in the BNPL universe.

To keep your business growth trajectory on target, you should ask iPartners, or your funding partner, to issue a small junior tranche of debt to free up some of your equity. This allows you to continue to fund the equity tranches of the warehouse or new warehouses.

You should now be able to potentially attract a senior warehouse from a medium size credit fund, smaller banks or credit unions.  This will significantly lower your finding costs.  NIM should start to accelerate.  Maybe you can upsize the senior debt facility / NIM capture funding for operation and / or growth capital.


Now is time to put in place a more traditional securitisation funding warehouse, this will require more equity subordination. An easier approach would be to issue a convertible bond and utilise those funds.

The traditional securitisation structure will likely be a 3 - 4 tranche structure, ideally with some very competitively priced senior tranche. Mezzanine and junior mezzanine investors who have supported you to date will roll into the larger traditional vehicle to minimise the equity required as subordination.

This is the period when growth is important.


At this point a large amount of new equity is brought on board, and an entity will transition its funding management to large institutional provided warehouses and public securitisation term transactions and compete in the big league with incumbents.  Stating the obvious, it is harder to build a $2bn book than it is to build a $150m book, although once scale is achieved the funding is a lower priority of all the challenges.