In the last couple of years, the alternative lending space has literally exploded. With the growing shift to digital, fintech companies are leveraging technology to innovate and disrupt traditional business models.
Founded in 2015, loan aggregator firm, Loan Frame is one such innovator which has found a unique niche to operate in – a niche which offers value alike to funds-starved small and medium enterprises and the banks and financial institutions.
Here, in a chat with ETCFO’s Mannu Arora, Rishi Arya, CFO and Co-Founder & Shailesh Jacob, Co-Founder and CEO, of the Gurugram-based online lending firm take a few questions about the finance function especially in start-ups, fintech and their business too.
Co-founder & CFO Arya says.
Unlike traditional companies, the role of a start-up CFO requires one to be more nimble, flexible enough to don multiple hats, capital efficient to make limited funds go a long way and the ability to work in a fast and ever-changing environment.
Q: In case of Loan Frame, a founder is a CFO. What is the need for a start-up to have a CFO?
Rishi Arya: Each start-up is unique and the need for the CFO is dependent on the type of business they conduct.
Key needs that a funded start-up CFO can fulfill are as below:
1. To set the highest standard of corporate governance
2. To have strong control systems in the finance department
3. To ensure adequate controls for regulatory and statutory compliance
4. To build forward looking projections and validate financial viability of the start-up idea
5. To ensure robust and transparent accounting of investor funds
6. To ensure capital allocation to highest IRR (Internal Rate of Return) projects/activities
Q: What makes for an ideal start up CFO?
Rishi Arya: Unlike traditional companies, the role of a start-up CFO requires one to be more nimble, flexible enough to don multiple hats, capital efficient to make limited funds go a long way and the ability to work in a fast and ever-changing environment.
Q: What are your views on the often-used term “digital CFO”?
Rishi Arya: Today, technology is cutting across all business functions including finance. In today’s digital age, CFOs need to look beyond their traditional accounting roles and focus on the big picture. CFOs must use data and technology to become strategists and efficient capital allocators keeping in mind a longer-term view of the markets they operate in.
The focus should be towards data driven decision making and long-term value creation for all stakeholders.
Q: How do you think finance leadership is changing as the businesses go digital?
Rishi Arya: Finance has become data rich with increase in the amount and freshness of data. It is now easier to identify profitable customer pools and allocate resources effectively. We no longer have to wait for long data consolidation cycles, and can course correct within a few days as the data is available almost immediately
Q: Where do you see the finance function going forward say in the next 5 years?
Rishi Arya: The finance function will be more strategic in the way it operates, actively identifying profit pools and tracking possible market core changes, or estimating business threats from adjacent or unrelated markets. The CFO role will definitely increase in importance over the next few years
Q: Give us a sense of your communication with the CEO? What all does it entail? What does the equation look like?
Rishi Arya: Highly engaging interaction with the CEO is key in start-up decision making. Finance needs to supply adequate financial analytics to the CEO to support commercially viable activities.
Q: Give us a sense of your business and business model? How are you intending to make money?
Shailesh Jacob: We are an online lending platform focussed on small businesses. We work with large and mid-size corporates in our channel financing program that enables adequate and low cost financing to dealers and distributors.
Corporates can contact us and quickly enable channel financing options to all players across their value chain. Currently, the platform is available free of cost to corporates and their dealer/distributor network. We charge a small fee to lenders on the platform.
Q: What is the competitive advantage you bring to the table for both lenders and borrowers? How are you leveraging technology?
Shailesh Jacob: We have technology-led channel financing platform solution that includes real time web and mobile app upload and approval availability for all parties.
For lenders, we provide a range of corporate clients and their value chain participants across industries that can be accessed immediately.
For corporates, we help them manage their complete channel finance program from start to end. If a corporate already has a running program, we help them increase dealer penetration and get better pricing for their distribution network by providing them access to multiple lenders.
Our channel financing solution allows us access to a range of transactional and business data that helps us in assessing business borrowers better. As the volume of digital data is very high, we use machine learning to assess borrowers.
Q: What do you need to do to exist in this ecosystem?
Shailesh Jacob: In this line of business, a cutting edge technology solution, trust, agility and competitive pricing are crucial factors. We have lenders that trust our platform for its origination, assessment and security and transparency.
Corporates prefer our solution as it’s a single system of record, is highly convenient as it is accessible on the go whilst providing significant revenue benefits as they increase capital to their ecosystem. Having access to multiple lenders and being technology driven, we ensure that borrowers have the highest chances of getting a loan whilst getting the lowest interest rates in the fastest possible time.
Q: What all different SME loan products you offer? What is the average ticket size, interest rate, credit offered and payback period?
Rishi Arya: Being an SME focussed lending platform, we provide the widest range of SME loan products including channel finance, secured and unsecured lending products.
Traditionally, SMEs have had limited options on loan products but at Loan Frame, we have as many as 50 distinct products to suit various requirements ranging from as low as Rs 1 lakh to as high as Rs 50 Crores. We cater to a very wide variety of sectors including retail, manufacturing, self-employed, pharmaceuticals, IT, services, health and FMCG among others.
Q: What is the risk analysis you do before lending?
Shailesh Jacob: We assess small business for their intention to pay and ability to pay. What matters most in small business assessment is the health of the business, i.e. the positive cash flows that a business is generating and whether these cash flows are enough to service the loan. We have the technology and speed that can assess very small businesses and help lenders give profitable small ticket loans.
Traditional data and new age digital data is used for analysing a borrower’s business health. While assessing businesses we conduct a cash-flow analysis of the borrower versus other lenders that would just look at borrower’s assets or use generic scorecards.
We also make use of sector specific data points to strengthen borrower assessment and arrive at a comprehensive comparative borrower risk profile. In terms of digital data, we use social media data, online footprints and ecommerce data to supplement our credit assessment process. We are also developing behavioural and psychometric scores that will help us better assess thin file customers.
Q: What happens in case of a default? What are the pitfalls for both the borrower and the lender?
Rishi Arya: Due to our strong focus on borrower assessment, we haven’t had a default to date. However, in case of a default our servicing team gets in touch with the borrower and helps them in making good the defaulted EMI.
We also have a number of other checks in place to keep defaults to a minimum, for example, in channel financing we have a stop supply arrangement with many corporates that play a key role in keeping defaults low.
Q: What is the regulatory framework that applies to you?
Rishi Arya: We work with a number of lenders on our platforms and follow the relevant compliance standards laid down for parties working with Banks and NBFCs.
Q: Many of your peers are moving towards a hybrid model? Is Loan Frame also considering that?
Rishi Arya: We are a technology company, enabling more efficient lending to small businesses. So, we provide all the technology to lenders to efficiently originate and assess a small business borrower, however the end decision lies with the lender. Our model has helped our lending partners in building their SME loan portfolio and also reduce their small business customer defaults.
Q: Going forward, what are the risks that you foresee for your business?
Shailesh Jacob: One of the challenges that we currently face is the slowness of technology adoption by corporates and lenders. However, it is accelerating and we think over time more C-level executives will be willing to rethink the way they can make processes better and simpler using technology.
Q: What is the road ahead for alternative lending and Loan Frame?
Shailesh Jacob: There is a huge opportunity to make a significant difference to SMEs who are currently under-banked. For us, the vision is to be the largest SME lending platform in the country, and work with corporates and lenders to be their preferred partner to start, manage and grow their channel financing program.
As we grow in scale, we look to attract both corporate channel finance partners and banks or NBFCs interested in channel financing and small business lending.
The article was authored by Mannu Arora for Economic Times on Aug 24, 2017.