Capital starved small and medium enterprises often find it difficult to raise funds to carry forward their business. Digital lenders are leveraging technology to extend unsecured loans to small businesses by using alternative credit scores. Manish Lunia, Co-Founder at Flexiloans talks about challenges faced by SME to access credit, secured vs unsecured credit, tie-up with PayPal and it’s aspiration to become the leader in the SME lending space. Edited Excerpts:
Q. What are the challenges faced by small and medium businesses when it comes to accessing credit?
According to a World Bank survey, less than 10% of the Indian population has access to formal credit, despite the fact that 80% of them have bank accounts. They often turn to friends, family, or relatives when they require any short-term loans, but this is not a sustainable idea in the long run as traders would require funds at all stages of their company’s development.
When a trader requires a business loan, the four most challenging conditions are discovering ease, clarity, and adequacy.
Today, MSME faces the usual problem of not knowing where to turn for a loan. They will have a bank account, but banks will not lend because they seek for collaterals. Banks also demand backdated or up to five years of transaction statements, which might not be the case with those looking to start a new company. Young businesses with cash flow but no collateral is unsure of which door to knock on.
Another consideration is the ease of application; a lone businessman may not have time to travel to a bank and do a physical submission or go through the formalities; he will find following up with a bank difficult and a waste of time without even knowing if the loan process will go through. When you consider the opportunity cost of time spent versus loan approval, there can be a dilemma.
The third characteristic is openness or transparency. If a trader requires funds, he approaches a Chartered Accountant, who recommends preparation of a provincial statement before applying for a loan; this procedure is often time consuming.
Fourth is adequacy; if a trader does a business worth Rs 3-4 lakhs, his working capital will be about 5 lakhs and in order to have some material effect, he must ensure that he has at least 1-2 months of additional capital. If a trader is to work on sustainability, adequate funding is needed.
Whereas Flexiloans.com is available in the majority of social networks, if a trader requires a loan, he just needs to click on the flexiloans.com link, and the application process is straightforward. We also have a supply chain financing facility with co-lenders that allows us to provide loans of up to 5 crores (Average ticket size of Rs. 2 crores) termed as Invoice Back Financing with FMCG companies. This channel financing facility is for a set of trustworthy customers, but we are not widely distributed in this field.
Q. What do SMEs prefer, secured or unsecured credit?
It is very situational; for short-term working capital needs, unsecured loans are required; security pledging is not always available and is also very emotional. If you have to pledge a gold loan or a property, you would have to ask for and use a product of your near and dear ones. Given an option, people will prefer to operate in a trust environment; they are not under any obligation, and they can close the loan whenever they want. Flexiloans.com offers short-term loans to meet the working capital needs without requiring any collateral from customers. The loan term is 12-36 months, and the supply chain facility loans is as short as 30 days, we have a flexible tenure with consumers having the option of closing it at any time with no additional cost.
Q. How’s Flexiloans.com placed in the credit market? And what opportunity you’re tapping into?
We aspire to be the national leader in data science and technology-enabled lending to SMEs for growth capital. We now have an 85% ecommerce and payment ecosystem and have partnered with 4-5 financial institutions with AUM in crores. We are an NBFC, but we work with other lenders as well. There is no issue with demand as we have the capacity to do the necessary as technology allows us to read a bank statement within minutes. We can also process a loan without a bank statement by developing alternative credit methods and coding through an algorithm. We have a strong ecosystem of demand creators and a good ecosystem of capital supply providers, so we are really capitalising on the potential by digital means. We will continue to work with partners in a viable manner.
Q. Where and how is the demand for Flexiloans.com loans coming from?
Loans are always in demand, as I had quoted earlier 90% of Indian population as per the World Bank are underserved. For us 60% demand comes from Tier 4 and below cities, 40% from top 4 metros and 15-20 cities. The sectors that are growing for us are ecommerce, pharmacies outlets, the Kirana stores, the grocery outlets followed by electronic appliances. Garments and fashions and accessories also are another sector that is in demand
Q. Could you please share the customer base and the average ticket size of loans?
We have disbursed over 35,000 MSME or business loans to approximately 15,000 customers, and as of this date on a monthly basis approximately 1,50,000 merchants apply for loans on our platform with already over 2 million people approached us in the past for loans. We serve through approximately 1500 locations throughout the country with customers from across 6,000 different cities and towns applying for loans. We are expanding month by month, with the aim of reaching 10,000 merchants every month and are the second largest lender in the country in terms of MSME loans. Last year around 20 lakh people applied for loans.
Our average ticket size is Rs. 5,00,000, with a minimum of Rs. 50,000 and a maximum of Rs. 50,00,000. In this range, everybody is an MSME customer. Our customers are all small businesses, but according to the technical concept of MSMEs, it may be 60-70 percent.
Q. During the last one year where did the demand come from?
We had approximately 1 lakh customers applying for loans and 20,000 providing us the required documentation and around 3,000-4,000 customers receiving loans every month. Despite the fact that there is a high demand, the legitimate demand for eligibility and acceptance is a source of concern during these difficult times. Groceries, electronic appliances, pharmacies, and ecommerce were the four key industries in the previous year. The overall industry’s demand for restaurant (F&B), retail sectors, textile market, Jewellery, and luxury segment services was not very strong.
Q. How do you view the support given to SMEs in the form of ECLGS? What more can be done?
ECLGCS is a good scheme for consumers; it has offered customers a good runaway over the last year. The MSME sector is experiencing difficulties as cash flow has decreased. The government as a whole is doing a fantastic job, but they could do a lot more if they helped Fintech or lending firms with either a guarantee or funding support from companies like SIDBI. Although certain arrangements are in place, they are not visible on the ground. If the government steps in and says we will cover 20% of the loans; please go ahead and disburse the loans. It will encourage lenders like us to take more risks, particularly if we get preferential pricing or support. My request to the Government is that you either instill trust in the consumer or the loan providers who are willing to take risks. We will pass on any benefits that we get directly to the customers. This, I believe, is the only viable solution for the sector.
Q. The synergy between Flexiloans.com and PayPal?
PayPal, a well-known and trusted brand is a global payments leader with a large network of MSME merchants in India. Freelancers and cross-country traders are a relatively unknown segment in the country, but are rapidly expanding, and they rely heavily on PayPal. As a company PayPal is preferred globally and in India for cross-border services or product sales.
PayPal currently has over 10,000 active merchants on their platform that have shown an interest in receiving funding. Flexiloans.com operates on a proprietary credit model, based on digital footprints, partner transactions, and cash flows, and we make real-time funding decisions to businesses in order to help them expand. We effectively disburse loans across India and have already partnered with seven of the top ten ecommerce platforms / payment brands in India for the last five years. This collaboration with PayPal is simply a natural extension for us.