One could argue that non-bank lender Earlypay (ASX:EPY) is a stock that’s been flying under the investors’ radar.

Some even think EPY is a growth stock that’s just beginning to gain traction when in fact, in its current form the company’s been around for over 10 years.

Launched by incumbent CEO Daniel Riley and his father way back in 2002, the company started life as a recruitment service provider before pivoting to SME lending in 2012.

The stock has been listed on the ASX since 2010, and has a long history of paying dividends.

In 2020, the company reverted its name back from CML Group to Earlypay, a name it had used previously from 2012 to 2015.

Riley explained to Stockhead that since inception, Earlypay has been growing rapidly through organic growth and acquisitons.

“We made a series of acquisitions commencing in 2015, where we acquired six of our competitors,” Riley told Stockhead.

“A seventh acquisition was the tech platform done in August last year,” he added.

That transaction was the strategic acquisition of Skippr Invoice, an online invoice financing platform that has allowed Earlypay to scale up its customer base significantly.

Technology doubles business volume

When it bought Skippr for $2.5m, Earlypay had practically brought forward its technology enhancement roadmap by approximately two years.

Importantly, the acquisition helped the company beat its full year guidance for FY21, delivering $8.7m in net profits for the full year.

That was followed by a smashing first half of FY22, where it posted a record half profit of $7.5m, a figure that was almost equivalent to all the profit made the previous full year.

“The robust growth we’ve experienced has taken us to number two in the non-bank space in Australia behind Scottish Pacific,” Riley said.

“And this year we’re on track for $2.5bn in invoice turnover.”

Riley said technology has been the enabler, which has doubled business volumes in the last 12 months without having to increase the number of staff or cost base.

This Riley says, is because the new technology has automated a lot of manual things the company did previously, such as uploading invoice batches and reconciling payments against those invoices.

“The business of invoice financing involves the high cost of building scale to move towards warehouse funding, and those things are expensive. Until you have scale, that cost represents a pretty significant percentage your income,” Riley said.

“Earlypay has gone beyond that point, and for us there is very little variable costs now associated with growing the business incrementally.”

But some still think the industry needs a bit of an image makeover, associating it with the Greensill debacle that spilled over to the market last year.

NOT Greensill

Riley says the Greensill business model is very different to what he does.

He explained that Greensill was more about going to very large companies and looking at their accounts payable, and taking those account payables off from the companies’ balance sheet.

“For example, giant Telstra may have 10,000 suppliers and half a billion dollars a month in accounts payable. Greensill was effectively taking half a billion of debt owed by Telstra and taking it to the bond market, who could price the bond nicely as Telstra’s credit is highly rated,” he said.

“Where it fell apart for Greensill was their clients weren’t all highly credit-rated businesses, there were others in the portfolio that had a lower credit rating.”

EarlyPay meanwhile, focuses on the smaller end of the market (the SMEs), and its exposure is spread across more than 500 SMEs compared to Greensill which has a concentrated exposure.

Additionally Earlypay focuses on accounts receivables where full repayment averages 37 days, whereas Greensill focused on the accounts payables.

“So in theory if one of our SME’s clients discontinues its business for whatever reason, that client is still legally on the hook to pay the invoice to the SME regardless, reducing the credit risk for Earlypay,” Riley continued.

NOT BNPL either

Riley also said Earlypay should not be categorised within the buy now pay later (BNPL) category.

“We don’t consider ourselves as in the BNPL space. There are other SME lenders who are looking at offering their customers the option to pay by instalments, but we see that as only suitable for micro businesses supplying to other micro businesses,” Riley said.

Earlypay’s business is more tailored towards SMEs who have supply contracts with larger Australian companies, Riley said.

“I can’t imagine BHP or similar businesses wanting to pay by instalments.”

“The BNPL model usually involves low invoice value, so it’s not really an area that we that we see as an opportunity at this stage,” he added.

Inflation to increase invoice size

Riley reckons that as the economy starts to pick up and inflation pushes prices higher, the average value of invoices will also increase as SMEs put their prices up.

“So for us, on the existing clients alone we expect growth from within that portfolio just from an adjustment in pricing related to inflation,” he said.

Riley says the focus for the year ahead will be on two things – organic growth and its existing equipment finance business.

“Our total transaction volume growth metric is one to watch for, as that represents our organic growth,” Riley said.

“We believe that our organic growth will increase exponentially because as we gain scale, we can bring on larger and larger clients.”

“As for equipment finance, we made some significant improvements to our product offering behind the scenes, so we’re really keen to take that out to the market again,” said Riley.

“Equipment finance has been a good contributor to earnings, but it’s been flat for a couple of years now. We’ve monitored the economic operating environment, and decided that it’s a good time to start moving in to that segment again.”



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