Like personal loans, SME lending has also gone digital. In a world where contactless services are becoming the norm, platforms such as NeoGrowth, Capital Float, Indifi, AyeFinance, Lendingkart and others are using tech and automation to help small businesses grow and scale up at a time when banks and traditional lenders have tightened their lending criteria.
When lending to a business, the lender needs to evaluate business fundamentals that require accurate and up-to-date information — some MSMEs might not even have formal ledgers. There are issues if someone lends to a micro-entrepreneur in a remote area. The lender needs to evaluate all their transactions for a certain period of time to understand the health of their business. These are problems that B2B lending startups are solving, and while at that, some like Lendingkart are also carving out profitability.
Ahmedabad-based Lendingkart doubled its revenue in FY20 to INR 464 Cr, registering a 113% growth, and reported a profit of INR 29.6 Cr after tax.
Since bringing on a new financial head in 2019, Lendingkart has been on track for an IPO in India. Lendingkart CFO Sudeep Bhatia, an industry veteran with more than 20 years of experience, believes that early innovation in fintech is the key to success.
“Fintech companies can grow multi-x during the first few years. Post that, a company’s growth is likely to intersect with the scale for some time in the second phase (just like a non-tech company) — then takes off once again based on inherent technological strengths and capacities. However, it is important for a tech-based company to create multiple touchpoints with clients and customers. Once in the second phase, the natural progression is to get listed and go public with your company.”
According to him, an IPO is a milestone for any company and factors such as profitable growth, ability to predict the growth trajectory, and corporate governance play an important role.
The Culmination Of Technology And Financial Strategy
An important part of the growth journey for any startup is fundraising and CFOs are instrumental in navigating the world of investments, advisors and compliance. Indeed, the responsibilities of a CFO extend even to utilising and leveraging the capital raised to enter the next phase of growth.
“As long as you are coming up with strategic solutions to achieve goals and are thriving amidst the challenges of a growing ecosystem, you will have no issues dealing with the investor expectations.”
Back in 2019, Lendingkart had a goal to raise INR 3000 Cr in a year through its banking partners and private investors. When Bhatia joined the company he noticed that other companies of the same size were raising just a fraction of this and it became a challenge to scale up with so much funding. The company would have to achieve five times the growth that its competitors had to justify the equity dilution.
“You can’t tackle these kinds of challenges around capital without having the advantage of deep industry experience gained over years”, he said, adding that startups often falter here without the experienced leadership driving finance.
He believes that a sound financial background is just the first step, but to protect the overall health of the company, a CFO needs to think not just financially, and also like a tech product manager.
“When I joined Lendingkart, I saw the opportunity to raise funds directly from large institutions under risk-sharing partnership models. Needless to say, banks have large balance sheets, but there are gaps to reach out to retail customers. Our business strength is to source lakhs of applications every month via digital platform,” he added.
So Bhatia’s first challenge as CFO of Lendingkart was to create a bridge such that banks can utilise the lending tech platform’s reach and in turn, help the startup grow its loan book. His solution was to create a co-lending platform. Bhatia contributed in planning, execution and even hiring people to build a team of 15 members for the project. In hindsight, this idea has proved to be a major breakthrough for the company.
Lendingkart takes pride in claiming that today they have created one of the best co-lending platforms with potential to become the largest co-lender in the country. He added, “We are geared up to touch INR 300-350 Cr monthly run rate shortly, and 35% of our business is presently coming from partnerships with these large institutions and banks.”
The Compliance Risks In Lending Tech
“When we’re talking about the lending sector, It is very easy to topple if you run faster than you could.”
For Bhatia, numbers alone can’t determine growth of a business. In fact, growth at the cost of capital can be the start of a journey towards the south. It is imperative to align the short term success with the long term vision and act accordingly. “ If you grow the business with focus only on short term targets without having a long term vision, then I think it can backfire,” he added.
And as Bhatia pointed out, even a slight change in RBI guidelines can disrupt the entire company in the lending sector. So it’s about having skills to manage compliance, financial strategy as well as technology. This is where a CFO becomes responsible for creating a balanced plan.
Sharing his insights, Bhatia said, “To create a plan for a lending business, one has to consider factors such as market size, where you are sourcing your customers, the credibility of the clientele and if you have adequate resources to scale up sustainably, whilst still managing the compliance and corporate governance.”
He also believes that these are crucial times for a CFO and they must look at larger parameters to achieve the overall desired goals. It becomes his responsibility to evaluate the risks and advise the stakeholders to take the right steps further.
Choosing The Right Partners
Navigating tricky situations can often mean just finding the right partner to help make the breakthrough. Businesses small or big, use a number of services, platforms and partners to make their jobs easier as they grow. Bhatia is a big believer that while there are a number of tools available to take care of compliances, marketing and more when it comes to finance, it is important to think, decide and choose the right banking partner.
He explained that the entire financial services ecosystem is interlinked where the clients and the banks lie on the same axis. The growth is directly proportional and hence, the right banking partner will contribute to the success of the business, in one way or another.
Where traditionally loans and funds are the basic needs, banks are not limited to transactional partners anymore. A startup today requires platforms to invest, technology partners, credit cards, 4D payments SDK and more. So a banking partner must deal effectively on all fronts, keeping the customers’ needs foremost. “Our banking partners help us serve our customers on multiple fronts including facilitating business through current accounts, overdraft facilities, credit card and insurance products catering to their holistic banking needs and supporting their business requirements at various stages.”
Find The Financial Strategy Fit
Of course, no one solution fits all companies. Bhatia pointed out that startups need to identify the problem and then address it with first principles thinking. How to directly get to the solution in the fastest way. This could mean giving up on the transactional mindset while working with a startup. Instead of fixating on the risk, they should pay attention to the vision and focus on building strategies to grow the business multifold.
“Ultimately, it’s about what works best for the organisation and about integrity to the mission for which you are standing. As long as you are continuously working to achieve that mission, all other problems become secondary.”