South African fintech startup Fundrr has secured funding from a Cape Town investor to help it in its mission of providing efficient term loans to small businesses that previously lack access to finance.
Founded by Idan Jaan and Jarred Noche, Fundrr provides loans of between ZAR20,000 (US$1,400) to ZAR500,000 (US$35,000) in size for three to 12 months in term to South African SMEs, with its seamless onboarding application process taking only eight minutes to submit and requests accepted or denied within 24 hours.
There are 2.4 million SMEs in South Africa, which together employ around 70 per cent of the working population, yet this market experiences a dearth of funding, causing a ZAR86 billion (US$6 billion) credit gap for small businesses. Each year, the number of SMEs in South Africa decreases due to their inability to access finance.
Jaan previously worked in a group which had 80 SMEs in the portfolio – hardly any of which were able to access bank funding.
“Those that applied for funding would wait 12 weeks for a decision, they had mountains of bureaucracy to get through, and even alternative lenders couldn’t help. It also took too long for a decision and funding was too expensive to be viable,” he said.
Fundrr plans to disrupt this market by funding ZAR1 billion (US$70.7 million) worth of South African business growth in the next five years and has just secured investment to help it on its way. Jaan and Noche began working on the business full-time in November 2017, got accepted into AlphaCode in February of last year, and launched the product a year ago. Bootstrapped, the startup funded its first loan in June 2018.
The startup has developed an automated credit model that analyses close to 100 data points, including factors like social media presence, to provide a more complete picture of small business and its growth possibilities. This produces a Fundrr score, on which basis the startup offers loans. So far, Fundrr has offered loans to 70 per cent of those who have applied.
Fundrr has developed various underwriting models for different industries as cash flow and operational patterns differ. The repayment of loans is also individually tailored.
“We analyse the cash flow patterns of the business. On this basis, we recommend a suitable payment structure collecting repayments either daily, weekly, bi-monthly or monthly over a three to 12 month repayment period,” said Jaan.
Rates of interest vary depending on the strength of the businesses. Lower risk businesses can expect to pay lower rates – unlike competitors who charge a flat interest rate irrespective of the risk. In addition, Fundrr does not penalise entrepreneurs for early repayment.
Jaan said the current South African SME landscape presented the company with a massive funding gap whereby small business owners either cannot get access to funding or get rejected by traditional lenders.
“We believe that by using alternative data-driven models, we are able to increase our approval rate to small businesses as well as provide capital in a quicker turnaround time,” he said.
Fundrr itself accessed financing in May, securing an investment from an unnamed “high profile angel investor”. The amount is undisclosed, but Jaan said it was “substantial” and would allow the startup to grow.
“Initially, we could not get access to any funding. We found it really difficult. Whomever we met with said they like the idea and the founders, but it was just “too early”,” he said.
“This forced us to bootstrap the first year of trading in Fundrr and fund it from our own life savings. In hindsight, it was the best thing that happened to us, but was really tough to survive in a personal capacity from month to month.”
The Cape Town angel investor, however, has bought into the startup’s vision and provided it with the capital to expand and grow.
“We believe that the hardest part of launching a startup in South Africa is accessing funding. Without funding, you cannot execute your idea, especially in such a capital intensive business. Owing to this we launched very conservatively, grew slowly, proved our systems, processes, and models. We are very excited to have finally received funding which will take our business to the next level,” said Jaan.
Fundrr is seeing “excessive demand” in the market for its product.
“Small business owners require financial support to grow their business and we believe that by providing them with a financial product like ours, they are able to prosper and expand their operations. We have been receiving applications and thankfully, have been approving 70 per cent of them and watching our clients grow, which is really rewarding,” said Jaan.
The startup only provides funding to South Africa-registered businesses right now but does plan to tap into other markets in the future. Its revenue model is based around interest earned on money lent, but Jaan said rates were highly competitive.
“That is our only revenue stream,” he said. “We do not have any other hidden fees, therefore transparency is key. We have been growing our disbursements of funds by 30-40 per cent month-on-month and profits follow a similar pattern. We believe in operating lean.”