New Fintech Startup Plans To Invest R1b In SMEs Over Next 5 Years

Idan Jaan is a co-founder of new SME financing entity Fundrr. Speaking to Heavy Chef, he outlined the origin of the idea: “According to the NCR, SMEs in South Africa do not last longer than three years due to the fact that they cannot get access to proper funding to either expand, grow or continue operating. We believe that accessing credit should not be a long and strenuous process and with that in mind, we formed Fundrr. We created Fundrr to allow SMEs to access seamless and efficient funding to empower them and help them grow.”

There are 2.4 million SMEs in South Africa that employ around 60 – 70% of the working population, but this market experiences a dearth of funding, causing a R86 billion credit gap for small businesses. Each year, the number of SMEs in the country decreases due to their inability to access finance.

We asked Jaan, why SME's are so important to the economy? “We, at Fundrr, believe SMEs are the backbone of the South African economy. Currently, SMEs contribute 30% to 40% of the GDP of the country, employ +-60% of the working population and the National Development Plan envisions that by 2030, SMEs will contribute as much as 80% to the country’s GDP. “

“By increasing the financing options and ability for SMEs to access finance in South Africa, will in turn, increase their revenue, contribution and job growth. According to research reports, 28% of new jobs that were created in the last 4 years, were created by SMEs.”

The founders of Fundrr plan to disrupt the market by funding R1 billion worth of South African business growth in the next five years to become the preferred alternative lenders for SMEs.

Both founders, Jaan and Jarred Noche are determined to make a difference in this market. 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,” he explains. “It also took too long for a decision and funding was too expensive to be viable.”

Noche, a CA, also noted how underserved SMEs are and that so many close within three years due to lack of funding. “Banks have no idea how to underwrite a small business because they use traditional sources of information which don’t give a true picture of the state of the business. For instance, they expect small businesses to have audited financial statements, yet many SMEs have no need for audited financials and can’t afford them.”

When asked how South Africa stack up against other emerging markets, in terms of access to funding for SMEs, Jaan is candid. “The total funding gap in all emerging and developing markets is estimated at $1.1 trillion. However, with that being said, studies show that it is much harder to access finance for these SMEs in emerging markets. We believe that with the rise of alternative lenders in the market, SMEs can access funding much easier and can compete with the rest of the world. South African SMEs are becoming more and more “financial ready” by having the ability to provide all financial documentation for financial institutions to able to underwrite them.”

Automated credit model

Jaan and Noche realised they needed to evaluate small business differently. So, they 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 a small business and its growth possibilities. This produces a Fundrr score, and on this basis, they are able to provide loans from R20 000 to R500 000. Fundrr has offered loans to 70% of those who have applied.

The business, which began last year in June, will fund South African businesses that have at least a 12-month track record, with a minimum of R1 million turnover or asset value. Fundrr is open to any industry and has funded businesses in food, retail, tourism, manufacturing, supermarkets, automotive, medical, health, beauty, accounting, entertainment, childcare and construction. They are open to B2B and B2C operations. Funding is typically used to buy stock, open new stores, purchase equipment, undertake renovations or expand the business.

Fundrr itself managed to attract substantial funding from an angel investor and has opened offices in Joburg and Cape Town. Its board has 40 years of tech and credit experience.

The application and onboarding are completed online in under 8 minutes and responses are provided within 24 hours. The information needed for an assessment is readily available for most businesses.

Lower rates for lower risk

Fundrr has developed various underwriting models for different industries as cashflow and operational patterns differ. The repayment of loans is also individually tailored. “We analyse the cashflow patterns of the business. On this basis, we recommend a suitable payment structure collecting repayments either daily, weekly, bi-monthly or monthly over a 3 – 12 month repayment period,” says 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, in fact the transparent and flexible model offers an early repayment incentive and specifies the amount of the loan, the duration and the total amount to be repaid.

Interestingly, 40% of the businesses that have received funding from Fundrr have returned for additional loans.

Dominique Collett, head of AlphaCode that identifies, partners and grows early stage financial service ventures for Rand Merchant Investments (RMI), comments, “One of the biggest impediments to the growth of SA’s SMEs is a dearth of funding. We are seeing that Fundrr is able to fill that gap in an extremely innovative way using technology and by rethinking the limitations of the incumbents in a largely staid credit environment.”