How FlexiLoans is taking a B2B2B route to help MSMEs access capital

In April, Mumbai-based micro-ticket loan provider for MSMEs FlexiLoans partnered with PayPal to tap into the cross-border payments giant’s merchant base. 

In June, the five-year-old company tied up with B2B healthcare marketplace Retailio, to provide working capital loans to over 100,000 retailers and distributors, in a deal that aimed to fund over 15,000 pharma retailers in the 18 months. 

A month later, FlexiLoans became the first lender to go live on Google Pay to try and onboard 50,000 small businesses. 

Using such a B2B2B approach to co-lend to India’s growing set of underbanked MSME borrowers, FlexiLoans has its eyes set on managing over Rs 5,000 crore of assets under management (AUM) by 2024. 

The company also plans to either get a banking license or prepare for an IPO by then. 

In an interview with TechCircle, co-founder Abhishek Kothari unboxed what has worked so far at FlexiLoans, growth projections and current go-to-market. 

Edited excerpts: 

What is the rationale behind the partnership playbook? 

The idea of every partnership that we do is, we get access to three things. We get access to a ready MSME pool. Google Pay is one of the largest UPI players in the country, almost more than a million MSMEs use Google Pay’s QR solution to accept segments. Now that is the segment where nobody lends to. Similarly, PayPal powers a lot of cross border transactions. Typically, exporter categories are something that are underserved. Not a lot of people get a loan in that category. Now what happens is when you onboard a partner, we get access to these MSMEs, we also get access to the data that is being generated on the platform. Besides, we get access to the kind of ability to co-create a product with our partners and bundle lending with their propositions. 

While there is no credit and risk participation by the platform at all, it is purely access to MSME arrangement… when we do a partnership, we then start giving loans to understand this MSME segment, and the end outcome is to create a risk model, which can be used to underwrite this segment at scale… what you see in the media is just three of the 30 partnerships that we have done in the last six months. These 30 partnerships will contribute to more than Rs 1,500 crore of disbursement in the next 18 months, as these are plug and play partnerships. 

How has business tracked over the last 18 months? 

In terms of our monthly run rate, as well as our AUM, we've grown about 2.4 times. Meanwhile, our employee base is same as what it was in March 2020, which is 250, without any physical office spaces. 

How did your first acquisition, CreditPeriod, turn out? 

Typically, supply chain finance has two products built into it, which is invoice financing and buy now pay later (BNPL). CreditPeriod was an invoice financing specialising company. Today, that product contributes to about 30% of our monthly disbursement. It is a fairly successful product. 

How does your current product pipeline appear? 

Today we have five products, which is the biggest suite of products that any fintech lender has. 

We have term loan, line of credit, merchant cash advance, invoice financing and our latest product launch will be BNPL. You have seen BNPL from the lens of a LazyPay or a ZestMoney, which is the B2C side of things. 

A large opportunity in this country is the B2B side, wherein when a retailer buys from a distributor or when a retailer buys directly from an Amazon business or a Nykaa, then they effectively mean credit, which in the last decade was offered by distributors. But now as distributors are being disintermediated, company has to infuse credit in that transaction, and that is what we are doing. 

Since we already have the lending ability and the technology platform to process everything, launching the product is effectively adding one more configuration into the platform. With BNPL, we will effectively be able to help every MSME, who buys directly from a manufacturer or aggregator and help them get 21 day credit, which was earlier offered by the distributor. 

When will the BNPL product be launched? 

In the next four weeks. 

What is your M&A thesis for the future? 

When an SME looks for a partner, they don't need a lending partner. They want a growth partner. When we go and speak to these SMEs, we realize that they're so underserved, not just in the financial services, but on many other ancillary services. You will see a KhataBook coming in, you will see an OkCredit coming in, you will see payments providers coming in. What we are looking for is early-stage startups who are helping MSME with non-financial services propositions, so we can bundle it along with our proposition. 

After sorting loan originations, how has FlexiLoans solved for the capital needs? 

On day one, we were an NBFC and when we raised the first round, everything was on our book. We realized one thing very quickly. This became kind of even more prominent when the IL&FS crisis happened. Growth of a fintech lender is going to be limited by how much capital they have. If you cannot find a supersonic way to get access to capital, then you will always have a start-stop-start-stop approach, because equity and debt are dependent on macro events. But for us, that is raw material. We cannot have our raw material being dependent on macro events. 

We effectively conceptualized co-lending even before the RBI norms had come in. So co-lending is effectively our answer to delisting ourselves from constant capital needs. Typically, we had to lend money, then we had to raise equity, and then raise debt on top of that equity, and that becomes our balance sheet. We lend from that balance sheet, and as that balance sheet reduces, we have to go raise another round of equity, because we cannot raise unlimited debt. Then we leverage on debt again, and the cycle would continue forever, and we will constantly be in the fundraise mode. 

But if you look at it, the largest pool of capital is banks and large NDFCs. Now we said, let us not go and ask for that from them. They have capital, and they want to deploy the capital, just that they do not have the risk understanding of this micro-MSME market, which we have. So we created effectively created a pipe between our systems, and prominent banks and NBFCs in the country. 

We could essentially draw capital on tap from capital pools without raising equity and debt. Today, we are a tech platform, where we happen to have an NBFC license. But we also have 10 other lenders on that platform. Now, if I complete the picture, what it means is that a seller on Amazon, who is sitting in Udaipur can effectively access our platform through an Amazon seller portal, go through the entire journey, which is few steps and clicks, and get a sanction. 

That sanction could be from any of the banks that we have partnered with, and the loan will effectively fit in the book of that bank, while the customer will never interact with that bank. Customer will always interact with FlexiLoans. We will manage their loan, we will absorb all the risks, we will effectively make sure that they keep getting more and more money as they need, and this allows us to now lock-in the merchant for decades rather than months… we are now a data analytics platform if you look at it. 

We have matched the demand and the supply in the best possible way because the demand is being generated through these ecosystems like Flipkart and Amazon. The capital is coming from these large pools of capital which is banks and NBFCs. We are a platform sitting in the middle making the entire magic possible while absorbing all the risks through data and analytics. 

Who are some of your banking and NBFC partners? 

There are five banks, such as RBL and Karur Vysya and five NBFCs such as Fullerton and Vivriti, on our platform, in the like of RBL… And the idea is, on one side, we have 10 lenders, on other side we have 35 partners today. We are enabling a 35 cross 10 number of interactions. Any of the 35 can go to any of the 10. Now the scale potential is that this 35 will go to 35,000 in India in the next 10 years, because there will be there will be more electric vehicle aggregations, restaurant aggregations, mobile seller aggregations and cement supply aggregations. 

How is your path to profitability shaping up? 

There are three or four key metrics that are important from a lender's perspective. One is what the AUM is. Second is what the monthly disbursement rate is. We are, of course, loss-making today. But if you have the time and energy to do this, you should see how every fintech in this space, what was their burn and loss, when they were our size. There are a few of them which are bigger than us, like a Lendingkart or Capital Float, or Neogrowth. They have been at the point where we are today. We are at about Rs 250 crore AUM today. At Rs 250 crore AUM, we are burning in a year what competition was burning in a month. 

That is made possible because of this co-lending strategy and a much focused strategy on the long tail of MSMEs through a risk-adjusted model. The key numbers I will give you Supriya, we are touching monthly disbursement rate of about Rs 100 crore a month, and we've only raised Rs 130 crore till date. A company that has raised only Rs 130 crore of equity till date is disbursing Rs 100 crore per month. You can imagine the return on equity that we will create for our investors. 

Could you tell us about the goals you have set for 2024? 

We should have been at about 5X size by now if pandemic had not hit. The Rs 5,000 crore AUM is easily achievable, because to do a Rs 5,000 AUM, I will have about 60-75% of it coming from our co-lender pool, which means it is pure technology at play. We will enable transactions, gather data, manage customers, and keep a higher share of the pie, because of our inherent risk understanding. 

The other 35% will come from our on-book lending, because we know that we will have to always experiment, and experimentation is best done with your own money rather than with somebody else's money. Let us say, tomorrow we find access to a partner who is serving MSMEs in jewellery segment, they’ve aggregated all the retail jeweller segment. Now there is no bank or NBFC who will touch a jeweller and give a loan to them. But if we believe that there is merit in this segment, then we will experiment lending on our own book, create the risk model with the ability to separate good from bad. And then we will bring a co-lending spike to scale to 10X… In the last three months we've on boarded seven ecosystems, each of which have access to about half a million MSMEs in the country. Just by pure scale of origination, partnerships, lenders, and risk understanding, it is an exponential flow now. The only thing that will stop us from doing that is the ability to raise capital on-book, which is never a problem. 

Also, your banking license or IPO plans of 2024? 

Once we hit a certain scale, Rs 3,000-crore 4,000 crore AUM of scale, then the question is whether go the IPO route, or whether go the digi-banking route, realize that and then go for the IPO route. Now, IPOs have become very fancy in the last six months. But we want to kind of wait and watch on how these markets are kind of behaving. IPO is appealing because it gives you access to constant capital, and hence the ability to grow quickly. The charm in banking is that it allows you to play in a digital space for a longer period of time, and offer more products to the customers before you go for your IPO. It is difficult to say what is it and how the market is going to turn out in the next three years. 

What is your current cash runway? 

The runway, if you look at it, because of our co-lending model is unlimited… if you forget the fact that we have are an NBFC… if we were to just fund for burn, we will need very low capital. We have got about 9-12 months of easy runway. Of course, we will raise more money to kind of fund more of the capital, the technology development, the acquisitions that I said we want to do, and also to build our on-book as an experimentation book. 

What’s the timeline to close in on your next fundraise? 

The timeline will be within this calendar year, by when we would want to close our next round.