Fueling Fintech Growth: How Lendable Powers Lending Across Emerging Markets

For digital lending companies, successfully providing loans to customers is paramount. However, the origin of these funds is a crucial consideration. Typically, financing stems from either equity or debt. While utilizing equity is an option, it can ultimately lead to founders relinquishing ownership as they seek capital for loan disbursement.

Carbon and FairMoney: Pioneering Digital Lenders in Africa

Recent reports from TechCrunch highlight the progress of two leading digital lenders – and digital banks – in Africa: Carbon and FairMoney. In 2019, Carbon secured $5 million in debt financing. FairMoney followed suit the subsequent year, raising a larger amount of $13 million.

Lendable: The Engine Behind the Financing

The UK-based firm, Lendable, is the provider of debt finance to both Carbon and FairMoney. The company maintains offices in Nairobi, New York, and Singapore, extending loans to fintechs operating across eight markets in Africa, Southeast Asia, and Latin America.

A History of Investment and Expansion

Since its inception in 2014, Lendable has distributed over $125 million to a diverse range of fintechs. These include SME lenders, payment platforms, asset lenders, marketplaces, and consumer lenders.

Future Growth and Investment Plans

Samuel Eyob, a principal at Lendable, revealed in a conversation with TechCrunch that the company is currently seeking to raise nearly $180 million to further its investment initiatives across three continents.

“We are aiming to secure more than $180 million, and we have investors who have already committed funds,” he stated. “We are actively investing from the already secured portion, with the intention of deploying the full amount throughout the year.”

The Founding Vision of Lendable

Lendable was established by Daniel Goldfarb and Dylan Friend. The company’s foundation stemmed from an observation made by Daniel during his time as a partner at Greenstart, a venture capital firm specializing in data, finance, and energy.

They recognized that individuals with the fewest resources often bear the highest costs for goods and services. Providing access to capital markets, and thus ownership opportunities, could empower these individuals to build wealth. This insight drove them to create a solution by supplying capital to fintechs that cater to these underserved populations.

A Commitment to Financial Inclusion

Samuel Eyob, a first-generation American of Ethiopian descent, understands the detrimental effects of limited access to fair financial services. Motivated by the millions of individuals and businesses inadequately served by traditional banks and MFIs, he joined Lendable to champion financial inclusion in these markets.

“Over a billion people remain without access to financial services, and numerous reports demonstrate a financing gap for micro and small businesses amounting to trillions of dollars – a gap that continues to widen. We perceive this as a significant opportunity. While our journey began in Africa, the lack of equitable financing solutions is a global challenge across emerging markets, which we are dedicated to addressing,” he explained.

From SaaS Platform to Direct Lending

In 2014, Lendable initially launched as a SaaS platform designed to democratize access to African capital markets through risk and analytics software. “Our initial goal was to introduce the securitization market from developed nations into Africa,” Eyob added.

The company developed an analytics platform to assess loan risk and employed machine learning to forecast loan portfolio cash flows. Furthermore, they created an automated investment platform to assist ventures in securing non-dilutive capital for business expansion.

A Strategic Pivot for Sustainable Growth

After validating its technology, the firm underwent a strategic shift. According to Eyob, the previous model experienced limited growth and incurred unsustainable costs. Consequently, in 2016, the company began raising capital based on its own analytics.

Initially, they secured $600,000, focusing on East African startups involved in SME financing and Pay-Go solar home systems. This figure has since grown to over $125 million across Africa, Southeast Asia, and Latin America.

The Importance of Debt Financing for Fintechs

Consider a venture capital-backed startup aiming to scale up lending to female-founded SMEs through one-year loans. The startup could utilize its equity to fund these loans, with interest payments representing the return. Alternatively, it could invest that capital in crucial areas like developer hiring, market strategy development, and securing a CTO – investments potentially yielding returns significantly higher than loan interest.

Therefore, debt financing presents an ideal, non-dilutive capital source, allowing the startup to avoid tying up equity for an extended period. Debt becomes an even more cost-effective solution as the loan portfolio expands to tens of thousands of loans, preventing constant equity dilution through continuous fundraising.

Lendable’s Portfolio and Impact

Over its five years of operation, Lendable has provided debt facilities to over 20 startups. The company typically focuses on startups that have progressed beyond Series A funding.

Beyond Carbon and FairMoney, Lendable’s portfolio includes Tugende, Uploan, KoinWorks, Planet42, TerraPay, Watu Credit, Trella, Amartha, Payjoy, Solar Panda, and MFS Africa. Through its partners, Lendable has collectively reached 1.2 million end borrowers and financed approximately 290,000 SMEs.

Risk Management and Low Default Rates

Eyob reported a default rate of approximately 0.01% on the $125 million disbursed to date. He attributes this low rate to Lendable’s proactive approach of maintaining constant communication with its partner companies, offering assistance, advice, and connections when needed.

“We view lending as a collaborative partnership, and we believe that with good faith from both parties, solutions can be found to overcome challenges,” Eyob stated.

Debt Facility Terms and Expectations

Debt facilities typically start at $2 million and can exceed $15 million. While the standard repayment period for debt investments is usually 4 to 6 years, Lendable expects its borrowers to repay within 3 to 4 years.

Encouraging Debt Utilization in Emerging Markets

Eyob advocates for founders in emerging markets to embrace debt financing as a means of scaling their startups. He observes a tendency for startups to prioritize equity funding over exploring the effective use of debt at critical growth stages.

Equity can be valuable for attracting top talent or expanding into new markets, but debt is essential for scaling capital-intensive operations such as working capital or pre-funding activities. Lendable believes that debt and equity are often complementary and aims to promote this understanding with its new funding.

“Like anywhere else, debt and equity are tools that should work together to support the venture’s overall mission. We maintain strong relationships with numerous VC teams across emerging markets, collaborating to support our shared investees,” he concluded.