What moves the needle of digital lenders is serving loans to their respective clients. But where does this money come from? The pool is generally made up of equity or debt. While some lenders use the former, it can be considered foolishness because over time founders tend to lose ownership of their businesses after giving too much equity to raise capital for loans. Hence the reason why most loan companies get credit facilities.
TechCrunch recently reported that two major digital lenders (also fully-fledged digital banks) are gaining ground in Africa – Carbon and FairMoney. In 2019, Carbon secured $ 5 million in debt financing and the following year, FairMoney did the same but raised a larger amount, $ 13 million.
Enter Lendable, the UK-based company responsible for providing both lenders with debt financing.
The company, which has offices in Nairobi, New York and Singapore, provides fintech loans in eight markets in Africa, Southeast Asia and Latin America.. Since its launch in 2014, the company has disbursed more than $ 125 million to these fintechs – SME lenders, payment platforms, asset lenders, markets and consumer lenders.
In a phone conversation with TechCrunch, Samuel Eyob, director of the company, said the company is raising nearly $ 180 million to continue its investment efforts on all three continents..
“We want to raise over $ 180 million and we have investors who have committed cash to us,” he said.. “Right now we are already investing from that amount because we have already closed on quite a few of them. Ideally, the objective is to invest this amount this year. “
Loanable Was found by Daniel Goldfarb and Dylan Friend. He was based on an insight they got while Daniel was a partner at Greenstart, a venture capital firm focused on data, finance and energy. This idea was that the poorest people in the world pay the most for goods and services, so if capital markets could pave the way for home ownership, it could help individuals build assets.. So the couple decided to solve this problem by providing capital to fintechs that meet the needs of these people.
Eyob, a first generation American from Ethiopia, knows what lack of access to equitable funding does to people and countries. Considering the millions of people and businesses not effectively served by banks and MFIs, Eyob joined the team to promote financial inclusion in these markets.
“More than a billion people still do not have access to financial services and many reports indicate that the funding gap for micro and small businesses is trillion dollars and growing. We believe it’s a huge opportunity. So, while we started in Africa, the lack of access to equitable financing solutions is an issue in all emerging markets, which we want to address, ”he said..
So, in 2014, Lendable started as a SaaS platform to democratize access to African financial markets by providing risk management and analysis software.. “We were hoping to do this by bringing the Global North securitization market to Africa,” Eyob added..
The company built an analytics platform to analyze loans and used machine learning to predict loan portfolio cash flows.. more to that, they created an automated investment platform helping companies raise non-military capital (not equity) to help them scale their businesses..
After enough proving its technology, the company has made a pivot. According to Eyob, the previous model was not growing enough and resulting in unsustainable costs. The company therefore started raising capital on the basis of its own analyzes in 2016. It raised only $ 600,000 and was focused on East African startups with SME financing and Pay-Go solar home models. That number has since grown to over $ 125 million in Africa, Southeast Asia and Latin America..
So why do these companies really need debt financing? Here’s a clearer picture of the instance used at the start of this piece.
Imagine a venture capital backed start-up whose ultimate goal is to help grow women-founded SMEs with one-year loans. The startup could easily use equity to provide capital for all one-year loans. The repayment of the loans, after one year, would be the interest owed to them. Or, he could invest that capital in hiring developers, developing a go-to-market strategy, hiring a CTO, all which would likely have gains of up to 100x many the interest they would have paid on the single SME loan is linked for a whole year.
Therefore ultimately, debt would be an ideal source of non-destructive capital for the startup as they would not have to tie up equity for a year. Therefore, the debt be a much cheaper source of capital to scale up their operations, especially if it has grown to tens of thousands of one-year loans. If it was fairness, they would have to raise an infinite amount with constant dilution as they scale up.
During its five years of official operations, Lendable has granted credit facilities to more than 20 startups. While the stage at which Lendable donates money differs, it is particular for post-A startups.
Besides Carbon and FairMoney, some startups that have contracted debts with Lendable include Tugende, Uploan, KoinWorks, Planet42, TerraPay, Watu Credit, Trella, Amartha, Payjoy, Solar Panda, Cars45 and MFS Africa. Collectively, Eyob said, Lendable has reached 1.2 million end borrowers through its partners and has helped finance up to 290,000 SMEs.
Of the $ 125 million spent on debt, Eyob said the company has a default rate of around 0.01%. The reason behind the low number, Eyob believes, is that Lendable makes sure it is in constant conversation with companies offering help, advice or contact when needed..
“We see loans as a partnership and typically when both parties act in good faith, there are ways to resolve the issues, ”Eyob said.
Debt facilities start at $ 2 million but can go up to over $ 15 million, Eyob said. But while the global standard for lenders to repay their debt investments is typically 4 to 6 years, Lendable expects the companies it donates to do so in 3 to 4 years.
Eyob urges founders in emerging markets to be prepared to accept more debt financing to scale their startups. These days, startups tend to give equity instead of weighing options to use effectively debt at critical points when scaling.
Equity could to be used to help attract the best talent or expand into new markets. Yet debt is essential when scaling up capital intensive operations like working capital or pre-finance activities.. More often than not, debt and equity are complementary, and Lendable hopes to use the new funds it raises to promote this notion..
“I think, fair like everywhere else in the world, debt and equity are tools that should to be used support each other, support the ultimate mission of the company. We have long-lasting relationships with many Emerging market venture capital teams we work with at ultimately support each other invested partners. “