FlexPoint Ford Backs Novel Financial in Small-Business Lending Push

FlexPoint Ford, the Chicago private equity firm that's built a two-decade track record backing financial services companies, has made a growth investment in Novel Financial Holdings, a fintech lender focused on small and medium-sized businesses. The deal, announced Wednesday, marks FlexPoint Ford's latest push into the digital lending space as traditional banks continue pulling back from the riskier end of small-business credit.

Terms weren't disclosed, but people familiar with the matter say the investment values Novel Financial in the low nine figures — a significant step up from the company's prior fundraising rounds. FlexPoint Ford is taking a minority stake alongside existing investors, with plans to help Novel accelerate its technology buildout and expand into new verticals.

Novel Financial, founded in 2018 and based in New York, uses machine learning to underwrite loans to businesses that fall outside traditional banking criteria — think companies with limited credit history, seasonal revenue patterns, or unconventional collateral. The platform has originated over $2 billion in loans since launch, according to the company's announcement, with default rates well below industry averages despite targeting borrowers banks typically avoid.

The investment comes as demand for alternative small-business financing has surged. Federal Reserve data shows commercial and industrial lending by banks to small businesses remains 12% below pre-pandemic levels, even as applications have rebounded. That gap has created an opening for fintech lenders like Novel, which can move faster and underwrite risk differently than traditional institutions constrained by regulatory capital requirements and legacy credit models.

For FlexPoint Ford, the Novel deal extends a clear investment thesis: back companies building the rails for next-generation financial services, particularly where regulatory friction or technology gaps create defensible moats. The firm, which manages approximately $3.5 billion across multiple funds, has previously invested in insurance distributors, specialty finance companies, and payment processors — businesses that sit between traditional banks and end customers.

"We've spent 20 years studying how credit flows to small businesses, and the gap between what banks can profitably provide and what business owners actually need has never been wider," said a FlexPoint Ford partner in a statement. "Novel has built underwriting infrastructure that didn't exist five years ago — they're not just filling a credit gap, they're redefining what's possible in this market."

That infrastructure includes proprietary data integrations with accounting software, payment processors, and industry-specific platforms that give Novel real-time visibility into a borrower's cash flows — data banks rarely access during underwriting. The company's credit models incorporate over 10,000 variables, compared to the few dozen traditional lenders typically use, allowing it to price risk more precisely and say yes to borrowers who'd otherwise face rejection or predatory rates.

FlexPoint Ford's bet is that this capability becomes more valuable as interest rates stabilize and competition for quality borrowers intensifies. Novel isn't competing on price — its rates are generally higher than bank loans — but on speed and approval rates. The company can deliver credit decisions in under 24 hours and fund loans within 48, compared to the weeks or months traditional processes require.

The small-business lending market is splitting into two distinct camps. On one side sit traditional banks, which still control the majority of outstanding loan volume but increasingly serve only the least risky borrowers — established businesses with strong credit histories, predictable revenue, and traditional collateral. On the other sit alternative lenders like Novel, which use technology to profitably serve everyone else.

That bifurcation accelerated after 2020, when pandemic-era government programs exposed how poorly equipped traditional banks were to move quickly or handle non-standard borrowers. The Paycheck Protection Program, despite its flaws, demonstrated that alternative lenders could process applications faster and reach underserved markets more effectively than the incumbent system.

Post-pandemic, many of those alternative lenders struggled as easy money dried up and investors soured on fintech business models that prioritized growth over unit economics. Novel, however, focused early on profitability. The company has been cash-flow positive since 2022, according to sources familiar with its financials — an anomaly in a sector where many players are still burning capital to acquire customers.

That profitability matters more now than it did two years ago. Capital for lending — whether from banks, credit funds, or securitization markets — has become more expensive and more selective. Lenders that can demonstrate strong credit performance and operational efficiency have access to capital; those that can't are shrinking or shutting down.

Novel's credit performance has held up better than many expected. The company's net charge-off rate — the percentage of loans written off as uncollectible — has remained below 3% even as broader small-business default rates ticked higher in 2023. Industry averages for similar lending sit closer to 5-7%, according to data from the Structured Finance Association.

Private equity growth investments often come with strings — board seats, operational mandates, near-term profitability pressure. This deal appears lighter touch. FlexPoint Ford is taking a board observer seat rather than a full seat, and sources say the firm's primary focus is on helping Novel access cheaper debt capital and navigate the securitization markets.

That's where FlexPoint Ford's network matters most. The firm has deep relationships with credit funds, insurance companies, and structured finance buyers — exactly the constituency Novel needs to reach to lower its cost of capital. If Novel can securitize its loan portfolio at attractive rates, it can pass some of that savings to borrowers, making its product more competitive against both banks and other fintech lenders.

FlexPoint Ford is also expected to help Novel think through M&A opportunities — both bolt-on acquisitions of smaller lenders with complementary borrower bases and potential partnerships with larger financial institutions looking to outsource their small-business underwriting. Several regional banks have explored white-label arrangements with fintech lenders rather than building technology in-house, and Novel's profitability profile makes it an attractive partner.

What Novel isn't getting, notably, is a new CEO or sweeping strategic redirection. Founder and CEO Marcus Johnson remains in place, and sources say FlexPoint Ford was explicit during diligence that it liked the existing strategy and wasn't investing to change course. That's a departure from some PE growth deals where the capital comes bundled with a new management team and a pivot toward faster revenue growth.

Johnson, a former executive at OnDeck and Kabbage who saw the first wave of online small-business lending boom and bust, has been public about prioritizing sustainable growth over land-grab expansion. In a 2023 interview, he said Novel deliberately kept its marketing spend low and focused on repeat borrowers and referrals rather than expensive paid acquisition — a strategy that's aged well as customer acquisition costs across fintech have soared.

One thing FlexPoint Ford will bring to the table: regulatory navigation. The Consumer Financial Protection Bureau has signaled increased scrutiny of fintech lenders, particularly around pricing transparency and algorithmic underwriting. Several alternative lenders have faced enforcement actions or consent orders in the past 18 months, often for practices that were common across the industry just a few years ago.

Novel's use of machine learning in underwriting, while a competitive advantage, also creates compliance complexity. Regulators want to understand not just whether the models work but whether they inadvertently create disparate impacts on protected classes — something even sophisticated lenders struggle to prove conclusively given the opacity of complex ML models.

Zoom out, and the Novel deal is part of a larger reshuffling of the small-business credit market. Banks aren't going away, but their addressable market is shrinking as capital requirements, regulatory overhead, and profitability pressures push them upmarket. That leaves an enormous segment of small businesses — profitable, growing, but not perfectly fitting traditional credit boxes — underserved.

Alternative lenders have rushed to fill that gap, but not all will survive. The business model requires cheap capital, strong credit performance, and operating leverage — three things that don't naturally align. Companies that got one or two of those right are struggling. Companies that got all three, like Novel appears to have, are attracting capital and gaining share.

The question is what happens when the economy softens further. Novel's credit models have been tested through one downturn — the 2020 pandemic shock — but that was an unusual recession with massive government intervention. A garden-variety economic slowdown, where small businesses face declining revenue without safety nets, would stress-test the models differently.

FlexPoint Ford is betting that Novel's underwriting holds up, or at least holds up better than competitors'. The firm has seen enough credit cycles to know that downturns separate disciplined lenders from reckless ones, and consolidation usually follows. If Novel can maintain performance while others falter, it gains market share and pricing power on the other side.

FlexPoint Ford typically holds investments for five to seven years, and sources say there's no near-term exit pressure on Novel. The company is profitable but still growing revenue at 40%+ annually, and both the firm and management believe there's significant upside to capture before exploring a sale or IPO.

Potential acquirers would likely come from three camps: larger fintech platforms looking to add lending capabilities, traditional banks seeking to outsource small-business underwriting, or specialty finance companies rolling up alternative lenders. Several large banks have quietly acquired fintech lending platforms over the past two years, preferring to buy proven technology rather than build it internally. Novel's profitability and credit performance would make it an attractive target.

The Novel investment stands out from recent fintech PE activity in a few ways. First, it's a growth deal, not a buyout or distressed rescue — Novel didn't need capital to survive, it wanted capital to accelerate. Second, the company is already profitable, which is increasingly rare among fintech targets. Third, the valuation, while undisclosed, is reportedly disciplined relative to the frothy multiples fintech companies commanded in 2020-2021.

Compare that to some recent deals where PE firms acquired struggling fintechs at steep discounts or stepped in to provide rescue financing. FlexPoint Ford is paying a premium, but for a business with demonstrated traction and economics that work. That's a different risk profile — and a different return expectation — than distressed investing or turnaround plays.

The broader fintech funding environment remains challenged. Venture capital deployments into fintech are down over 60% from 2021 peaks, and many later-stage companies are stuck in valuation limbo — unable to raise at prior valuations but unwilling to accept down rounds. Growth PE firms like FlexPoint Ford are stepping into that gap, but they're selective, focusing on companies with real revenue and margins rather than growth-at-all-costs stories.

Novel fits that profile. The company isn't reinventing banking or chasing massive TAM expansion. It's solving a specific problem — faster, better underwriting for a defined segment — and doing it profitably. That's the kind of business that attracts capital in 2024, even if it wouldn't have generated the same hype three years ago.

Three factors will determine whether this investment pays off for FlexPoint Ford over the next five years.

First, can Novel execute on securitization at scale? The company has done small securitizations to date, but scaling that up — issuing hundreds of millions in asset-backed securities annually — is operationally and structurally complex. If Novel can't access the securitization markets efficiently, its cost of capital stays high, limiting growth and profitability.

Second, how does the regulatory environment evolve? If the CFPB or state regulators crack down on algorithmic underwriting or impose new disclosure requirements, that could force costly system changes or slow Novel's expansion into new markets. FlexPoint Ford's regulatory connections will help, but only so much — if the rules change fundamentally, even well-connected firms feel the impact.

Third, what happens to competition? If banks re-enter the small-business lending market aggressively — either by lowering standards or by adopting better technology — Novel's growth could stall. Conversely, if more fintech lenders stumble and exit, Novel gains share. The competitive dynamics are fluid, and the winners over the next few years won't necessarily be the ones winning today.

FlexPoint Ford is betting that Novel has the underwriting discipline, technology advantage, and management team to navigate all three of those variables better than competitors. That's not a certainty — it's a thesis. But it's one backed by a firm that's spent two decades studying this market and has made money betting on less obvious opportunities before.