Getting a business loan can be a herculean task for small business organisations and startups because of the huge risk factor and the instability involved in the typically cash-reliant operations. While a small business loan can be the best thing for SME businesses, most lending institutions are not yet ready to take a data-led call on serving credit to this segment.
While technology is changing the game, the reach of large private banks is still unmatched by the rising breed of lending tech startups in India. Most banks provide secured loans with alluring terms and rates of interest. However, a small business without collateral to offer would fall at the risk of failing the eligibility criteria for securing business loans.
“Digital lending is certainly a fast growing business. However, it is a lending business at the end of the day. So to that extent you have to be careful about asset quality. You cannot be growth at all costs, which you can do in other businesses. There is a natural sweet spot in terms of growth rate that lending businesses will strike,” says Indifi MD and cofounder Alok Mittal in an interview with Inc42.
According to estimates, there are 411 alternative lending startups operating in India and as per a survey conducted by BCG and Google in 2018 23% of consumers in India have availed of retail loans digitally.
According to Datalabs by Inc42 report between 2015 and Q1 2019, the total investment in Indian fintech startups was $7.62 Bn with a total deal count of 478. Out of the total funding, 50.13% or $3.82 Bn was in payments tech startups, followed by 25.49% ($1.94 Bn) in lending tech startups, while other fintech startups made up 16.35% of the total investments, and insurance tech contributed 8.03% ($612 Mn).
Industry analysts have hinted at a slowdown, and consequently credit demand is also on the rise. “With the slowdown, there is a natural expansion of demand. However, there will be more stress on the industry and you have to be more careful about whom you choose,” Mittal added.
Founded by Mittal and Siddharth Mahanot in 2015, Indifi Technologies focusses on credit solutions for small and medium enterprises (SME). The company provides term loans, line of credit, invoice discounting, and merchant cash advance services customised for small and medium businesses in travel, ecommerce, retail, food service and hospitality industries. The Gurugram-based B2B lender claims it has disbursed 25K loans and wants to add 100K new customers in the next four years.
Indifi has a whole host of competitors as the SME lending space has thrown up a huge opportunity for fintech players. LendingKart, CashSuvidha, Capital Float, Faircent, iLend, Flexiloans, Zest Money and others have begun well in the digital lending space particularly in the B2B model.
Indifi raised INR 145 Cr ($21 Mn) in its Series C funding round in July 2019, led by the CDC Group. The company also has additional investors like Accel India, Omidyar Network, Fair Finance Fund and Elevar Equity. The company is in the process of utilising the funds to modernise and expand the existing business into new areas of business, develop infrastructure, capital expenditure, expand the lending business and general corporate expenditure to meet objectives.
“We are in the process of using the capital. We are testing new industries and making the experience more seamless. That’s the fixed investment. Part of the capital also goes back to lending,” Mittal told us.
It raised its first round from Accel Partners and Elevar Equity. In 2016, the company ended its Series B round of investment after Omidyar Network, a philanthropic investment firm, invested $10 Mn in the company.
How Indifi Offers Instant Business Loans
Startups and SMEs feel the need for quick and easy access to funds at many stages of growth. It could be for expanding current operations or setting up inventory or for larger projects. However, often access to funds can be a complicated process, especially when the businesses cannot offer collateral.
Mittal talked about traditional lenders mostly offering loans to businesses on the basis of collaterals, a criterion that many small businesses are unable to meet. This often leads to a need-gap for the availability of credit, which is primarily what most lending players are attempting to bridge.
Indifi’s lending platform offers also uses automated mechanisms for the whole loan application and the disbursal process. Here is the typical process of applying for a business loan with Indifi:
- A business owner needs to fill basic business and KYC details
- Indifi uses technology involving advanced algorithms to get relevant data from other sources, to determine the creditworthiness of the business
- Data analytics majorly involves funnel optimisation to understand typical lending journey and marketing analytics
- Small businesses can avail quick and simple business loans from Indifi based on their established transactions with other businesses
- Indifi offers instant business loan of up to INR 50 Lakh within 48-72 hours
- Indifi takes an on-the-fly call on which document requirements can be waived off for each loan application
Indifi’s key advantage is that can provides loans to businesses such as restaurants or online sellers on the basis of their current and previous transactions with aggregators or marketplaces.
The company also partnered with Swiggy in 2017 to provide loans for its partner restaurants.
Indifi primarily focuses on underserved sectors. While traditionally underserved sector meant Tier 2 and Tier 3, it can actually be a huge part of metro cities as well, which is also what Indifi serves.
“So far we haven’t figured out the lending and control risk across these pockets [Tier 1 vs Tier 2]. So the problem is democratic.”
Credit Growth In The Logistics Sector
Indifi’s USP lies in going for verticals than across the sectors. With a focus on verticals that are the most underserved, Indifi is now looking at the logistics sector to lend to fleet operators and truckers. It’s looking to offer loans in the ticket size of INR 1 Lakh – INR 50 lakh and the transporters can avail credit based on monthly sales volumes and projected revenues. Digital lending platforms like Indifi offer up to 2x the monthly sales as credit, without any collateral.
While the trucking industry in India is estimated to be around $100 Bn in size, around 30-40% of the sector financed by the organised sector. The rest is the opportunity for lending tech startups, and Mittal said it felt like the best move.
“About 75% of the business is based on partnership with other businesses in the ecosystem. Our basis of differentiation is the industry-specific approach. Very few of our peers are going for that. They tend to go after every SME,” Mittal told Inc42.
Speaking of partners, Indifi has brought on board MakeMyTrip, Djubo, Goibibo, Riya Travel, Shopclues, Foodpanda Yatra, Pine Labs among others to leverage their internal customer data for SMB lending.
“We prefer few verticals rather than going across the board. This is because there is an underserved category across cities and so the demand is huge. It is important to specialise in a few verticals to understand risks better.” – Alok Mittal
Mittal said a travel agency has different credit needs than a restaurant business. He feels by putting everything in one bracket, many lending companies tend to overlook some of the risk factors.
While specialising in verticals gives an edge to Indifi, most lending startups are leveraging the growing startup ecosystem. The traditional lending institutions measure a loan against the valuation and stage of startups and perform background checks like cash reserves, balance sheet, cash flow position, credit history — some may even ask for a personal assurance against the loan. This makes life difficult for startups.
Loanzen and BlackBuck are some other startups lending to driver owners, fleet operators and even first-time borrowers, to finance vehicles and also to fund purchases of spare parts.
Bengaluru-based Porter, with a network of over 40K trucks, is planning to foray into this space next year. The startup intends to offer loans to driver partners even for personal requirements, like emergencies in the family, weddings, accident costs and others, says the report.
“For us the key dimension of innovation is along the industry vertical. For example, we realised that for travel agencies one of the key risk factors is how volatile they are. They are a very large business that cash flow can vary dramatically. That is just one of the criteria we look into,” Mittal said.