Millions of Americans live paycheck to paycheck, and struggle to get out of a debt cycle.
One startup is developing financial products targeted toward this segment of the population, with the goal of helping them build credit, save money, access funds and plan for the future.
That startup, SeedFi, announced Wednesday it has raised $50 million in debt and $15 million in an equity funding round led by Andreessen Horowitz, also known as a16z. The VC firm also led SeedFi’s $4 million seed funding when it was founded in March of 2019.
Flourish, Core Innovation Capital and Quiet Capital also participated in the latest financing.
SeedFi was founded on the premise that it is difficult for many Americans to get ahead financially. Its founding team has worked at both startups and big banks, such as JPMorgan Chase and Capital One, and operates under the premise that many legacy financial institutions are simply not designed to help Americans who are struggling financially to get ahead.
“We’ve seen firsthand how the system has been designed for underprivileged Americans to fail,” said Jim McGinley, co-founder and CEO of SeedFi. “Our average customer earns $50,000 a year, yet they pay $460 a year in overdraft fees and payday loan companies charge them APRs of 400% or more. They barely make enough to cover their expenses and any misstep can set them back for years.”
In previous roles, McGinley was responsible for payday loans for underserved communities.
“There I got insights to the financial difficulties they had and the need for better products to help them get a step up,” he told TC.
Co-founder Eric Burton said he can relate because he grew up in Central Texas as part of “a super poor family.”
“I experienced all the struggles of being low income and the necessity of taking on high-priced credit to get through day to day,” he recalled. “I personally was trapped in a debt cycle for a long time.”
In fact, a job offer he got from Capital One was temporarily rescinded because the company said he had “bad credit,” which turned out to be a result of unpaid medical bills he’d incurred at the age of 18.
“I didn’t know about them, but was able to get the job after using my signing bonus to pay off that debt,” he said. “So I can understand how a certain starting point makes it very hard to progress.”
SeedFi’s goal is to tackle the root of the problem. It launched in private beta in 2019, and helped its initial customers build more than $500,000 in savings — even during the COVID-19 pandemic.
Now, it’s launching to the public with two offerings. One is a credit building product that is designed to “create important long-term savings habits.” Customers save as little as $10 from every paycheck, which is reported to the credit bureaus to build their credit history, and are then able to generate $500 in savings in six months’ time.
After six months of on-time payments, SeedFi customers with no credit history were able to establish a credit score of 600, while customers with existing credit scores and less than three credit accounts boosted their scores by 45 points, according to the company.
The concept of enabling consumers to build credit history beyond traditional methods is becoming increasingly more common. Just last week, we wrote about Tomo Credit, which provides customers with a debit card so they can build credit based on their cash flow.
SeedFi’s other offering, the Borrow & Grow Plan, is designed to be a more affordable alternative to installment or payday loans. It provides consumers with “immediate access” to funds while also helping them build savings and credit.
Andreessen Horowitz general partner Angela Strange , who has joined SeedFi’s board with the financing, believes there’s “a massive business opportunity for new financial services entrants to reach historically underserved populations through better product experiences, underwriting and technology.”
In a blog post, she shares an example of how SeedFi works. The company evaluates risk and extends credit to a customer that might be traditionally hard to underwrite. It determines how much to lend, as well as the proportion of dollars to give as money now versus savings.
“For instance, a typical SeedFi plan might be structured as $500 right now and $500 reserved in a savings account. The borrower pays off $1,000 over time, and at the end of the plan, he or she has $500 in a savings account. Not only has the borrower paid a lower interest rate, he or she is in a better financial position after making the decision to borrow money,” Strange writes.
Looking ahead, SeedFi plans to use its new capital to build out its product suite and grow its customer base.
“We will be able to more efficiently fund our growing loan portfolio and serve more customers,” McGinley said.