Xero snaps up small business lender Waddle for $80 million

ASX-listed cloud accounting giant Xero is buying invoice financing startup Waddle in a deal worth up to $80 million, as it gears up to enter the lucrative small business lending market.

Xero boss Steve Vamos said the acquisition will allow Xero to better leverage the $850 billion in invoices that flow through its platform each year.

"When you look at the range of applications being used by small business there is still tremendous scope for growth and we're really focused on not just helping drive the adoption of cloud accounting but also extending the Xero platform to do more for our small business customers," he said.

Waddle co-founder Simon Creighton has sold the startup to Xero for up to $80 million. Credit: Wolter Peeters

The deal comes as Xero's shares hit over $100 on Tuesday surging to $101.24, valuing the company at $12.86 billion.

Waddle is a cloud-based lending platform that allows small businesses to take a quick secured loan against their accounts receivables. The startup also enables banks and fintechs to more easily lend to small businesses by leveraging their accounting data and automating many of the manual processes in invoice financing.

Waddle was founded in Sydney in 2014 by Simon Creighton and Nathan Andrews after the pair met at high school and has since grown to a staff of 25 and written over $330 million of loans.

Under the terms of the deal, Xero will make an upfront cash payment of $31 million and subsequent earnout payments of up to $49 million for a total purchase price of up to $80 million.

Mr Vamos said the acquisition tied into Xero's broader strategy of being a global player with a long-term view of trying to solve the biggest challenges its customers face.

"We've always indicated that whether it's making payments or being paid, the elements important to managing cash flow have a logical connection with Xero as an accounting platform," he said. "Then you have a whole bunch of lenders who have challenges in getting money to small business because there's obviously challenges in understanding the underlying performance and trading conditions of those businesses."

Xero will retain Waddle as a stand alone brand and will continue to offer competing invoice finance providers Fundtap, Timelio and Finstro on the Xero marketplace.

Waddle has existing agreements with banks, lenders and accounting platforms, including a deal with Natwest (formerly Royal Bank of Scotland) in the United Kingdom which it signed last year and Scottish Pacific and MYOB in Australia.

Mr Vamos said Waddle would continue its partnership with Xero's rival MYOB and the acquisition would likely strengthen Waddle's bid to add partnerships with more banks and lenders.

"I'm pretty confident Waddle can secure those arrangements and certainly now as part of Xero we'd obviously support that because we do want as many financial services players connected to the platform as we possibly can," he said.

Forrester analyst Zhi-Ying Barry said Xero was one of a number of players in the sector trying to build small business ecosystems with Amazon, Ebay, Sage and MYOB also working on expanding their offerings.

"We are starting to see the shift from just providing accounting to really helping small businesses address their finance needs," she said. "Technology or software providers are looking to expand the services they provide to small business."

Ms Barry said she expected to see Xero more aggressively build partnerships with lenders offering them the Waddle platform.

"This will be the start of many of these acquisitions going forward with these software startups either being acquired or merged," she said.