Frequently turned down by conventional financial institutions under the pretext that they carry high risk but low returns, small and medium enterprises must be creative in their search for capital. Data and technology can solve the problem.
Vihang Patel and Tan Sian Wee noticed the issue when they were both working as advisers at Monk’s Hill Ventures. In 2016, they decided to team up and build Finaxar, a lending platform for SMEs that is linked to a vast amount of data, such as general market information, seasonal patterns, seller performance, and ratings.
“We saw the potential in the alternative lending industry as the SME sector was growing,” Tan said in an interview with KrASIA. “We wanted Finaxar to fill the gap where traditional providers of capital are unable to.” By that, he meant the technology gap. None of the incumbents are really using tech to solve the liquidity problem, according to Tan.
Their approach allows Finaxar to process loans faster—two to three hours instead of the days or weeks that a bank would require. For credit assessments, the firm has integrated their systems with platforms such as Lazada and Stripe. It also monitors customer accounts—including bank statements and their cash flow—on a daily basis.
By using data and technology, Finaxar claims to provide a viable financing solution for SMEs, as well as the infrastructure for financial institutions and e-commerce platforms that want to access this previously untapped market. The company is able to underwrite and extend loans that are operationally too expensive and unprofitable for conventional banks.
Finaxar is currently serving hundreds of customers on its home turf in Singapore while ramping up operations in Hong Kong, Vietnam, and Malaysia. Its focus is on short-term loans that span up to six months, which are usually not available at major financial institutions.
Balance sheet trumps peer-to-peer
Peer-to-peer (P2P) lending platforms, which connect lenders and borrowers, have recently become popular among smaller companies. For Finaxar’s founders, the model bears too many risks. Tan observed that in the US, many P2P lenders are evolving towards a balance sheet-based or hybrid model. So he decided to follow suit.
“We thought: why don’t we begin with a balance sheet instead?” Tan explained. “There hasn’t been one in Southeast Asia yet that is tech-enabled, so we decided to start on that basis.”
Unlike P2P platforms, balance sheet lenders raise money from specialist funds and asset management companies, then disburse loans from its own pocket. This is more like what banks do, with the exception that these alternative lenders don’t ask borrowers for collateral.
“We just go and source a large pool of money from a few institutions, which I can count on one hand, and that’s it,” Tan said. “Let’s say they allocate 10 million dollars to us, so what happens is that we lend the money out and we basically just keep it rolling, because when clients pay back, we deploy it back again.”
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Like this, Finaxar doesn’t have to worry about taking care of too many small investors and can save operational costs. The company then passes the benefit to its customers by offering rates that are lower than those offered by regular P2P lenders, slightly higher than those of banks.
Balance sheet lending bears its own hazards, however. Finaxar takes on the credit risks of the borrower, which requires a thorough and cautious customer screening process.
“Because what you lose is your money,” Tan pointed out. A P2P platform acts as an intermediary and doesn’t have a balance sheet, so technically it’s not their money.
In order to mitigate default problems, Finaxar always conducts a detailed background check on loan applicants, including business and market analysis. The partnerships with e-commerce and cloud-based accounting platforms support the process. The firm’s default rate runs below 2%, according to Tan.
Leverage through partnerships
Since the beginning, the founders knew that access to data will be the key to success, and that technology must be the main feature.
“We want to be a technology company that happens to do lending as a product,” Tan said. “It’s the only thing that guarantees scale, you need data.”
To gain access to more data, Finaxar collaborates with large players in their target markets, like Lazada and Amazon, who are using the platform to extend credit lines to their merchants. It also teamed up with Global eTrade Services (GeTS), offering solutions to its supply chain platform CALISTA. In Vietnam, Finaxar partners with Indovina Bank.
Merchants, for example, get easy access to loans to ramp up for major events such as Chinese New Year and Christmas. “They need to stock up, but they don’t necessarily have the funds. That’s where we come in,” said Tan.
Partnerships with banks serve another purpose as well. Finaxar provides technology to ease their shift to digitization. Partner institutions offer co-branded Finaxar products, while the startup manages the back end process, including software, credit, and operational assessment. The firm also gains access to even more data from thousands of bank clients.
Tan explained that the company is always open to new partnerships, whether conventional or digital. He doesn’t think that newcomer digital banks want to target the SME sector immediately, but they might be in dire need of data to operate successfully. Both conventional and digital banks will have to partner with other institutions, like fintech platforms, to step up their game.
In 2020, Finaxar aims to maintain its growth rate and expand within its existing markets. The COVID-19 outbreak brought a spike in demand, especially from SMEs in the hospitality sector.
“However, this can be a double-edged sword, especially since we underwrite the risks as a balance-sheet lender,” said co-founder Patel in a separate statement. To adapt to changing client needs, Finaxar proposed new solutions, such as extended repayment periods and a supplier financing line, to ensure that local supply chains are well-supported.
This article is part of KrASIA’s “Startup Stories” series, where the writers of KrASIA speak with founders of tech companies in South and Southeast Asia.
