Capital Float: Leveraging Data for Loans to Small Businesses
“We started Capital Float with the belief that technology and data would be the key drivers in cracking SME financing in India. Over the past year, we’ve focused on building the platform to deliver what our customers want above all else – flexible and ultra-convenient access to finance that can scale with their business. By leveraging alternative data in our underwriting model, we are increasingly able to not only make faster decisions but also lend to emerging business models” – co-founders of Capital Float, Gaurav Hinduja and Sashank Rishyasringa.
Despite running healthy growing businesses, entrepreneurs in India consistently struggle to raise timely credit from banks. Those that succeed often have to pledge personal property to fund business needs. Restrictive lending policies, inflexible collateral requirements, and slow disbursement times by formal financial institutions frequently push Small & Medium Enterprises (SMEs) towards informal financiers; but while these lenders are quick to offer funds, their monies come at very high rates of interest, perpetuating the cycle of debt. A new breed of capital providers who are leveraging data and analytics have started to emerge in the Indian space to help overcome this challenge. One such firm which has gained traction in the recent period is Capital Float, founded in 2013 by two Stanford MBAs.
About Capital Float:
Capital Float is an online platform that provides working capital finance to SMEs in India. They offer flexible, short-term loans that can be used to purchase inventory, service new orders or optimize cash cycles. Borrowers can apply online in minutes, select desired repayment terms and receive funds in their bank accounts in 7 days with minimal hassle. Capital Float provides SMEs 3 things above all – simple access to credit, collateral-free terms, and a trustworthy partner. Their mission is to bridge the current gap in the market with innovative and flexible credit products for SMEs, delivered in an efficient and customer-friendly manner.
Business Model:
Capital Float provides loans to SMEs by assessing their history through partnering with e-commerce players. Most of the SMEs that are serviced by Capital Float are merchants with a strong presence on e-commerce websites. Capital Float uses quantitative details like financials from e-commerce partners to gauge the profile of the SME. In addition, Capital Float’s technology scores applications based on online data, including customer feedback and transaction history from online marketplaces. It also does psychometric assessments: in other words, applicants are asked questions to judge things like their ability to scale a business, attitude toward credit, and how they compare to competitors. Applicants are approved after the platform accesses their suitability based on 2,000 data points.
This use of data enables Capital Float to provide quick turnaround on loan disbursements within 7 days as opposed to traditional banks which take a significantly longer time to process the loan disbursements or as opposed to informal lending which has significantly higher interest rates.
Value Creation & Capture:
Capital Float creates value to SMEs through quick turn around on loan disbursement. This helps SMEs in their business operations and growth while paying lesser interest rates on the loans. The standard rate that Capital Float charges is 16% p.a. which in the Indian context is not a very high rate for SMEs for a loan without a collateral. The value capture is the spread that Capital Float makes after paying interest rates for the capital they raise. Currently, the loan book has been funded through Venture Capital funding. As the business scales they will look to sources like debt raising and bond issuance that traditional NBFCs (non-banking financial corporations) have used.
Opportunities & Risks:
Capital Float is playing in a market which provides them a lot of white space to grow. The business is linked to the rapidly growing e-commerce market in India. Capital Float is enabling merchants on these e-commerce platforms to finance their growth which in-turn benefits the e-commerce players who in-turn would build even stronger partnerships with Capital Float. This cycle of mutual benefit is going to be a big driver for Capital Float. The partnerships with e-commerce players also ensures lower NPAs (non-performing assets) as Capital Float can deduct the capital payments at the e-commerce players as and when the merchants sell to customers.
While the opportunities are abundant, there are also certain risks that Capital Float needs to bear in mind. The biggest headwind in the new age digital businesses has been the lack of discipline in competition where players, with access to abundant VC funds, have been underpricing and operating on losses. Capital Floats business until it builds scale has limited barriers to entry. This can lead to a situation where the number of competitors increase which leads to a price war that creates an industry operating at significant losses. The other major risk for Capital Float comes from its dependency on e-commerce players for certain data points they feed into their proprietary technology to assess loan disbursement. If e-commerce players decide to move into the business of loan disbursements (like Alibaba did with MYbank in China) or form exclusive partnerships with any competitors that can lead to a major challenge for Capital Float.
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Having all that; Capital Float is fulfilling a major need in the Indian SME space. SMEs which have been starved for growth financing for many years now have a reliable alternative source of capital to look to. The Indian SME space is going to see massive growth in the upcoming decade and businesses like Capital Float are essential to enable this growth and develop a win-win ecosystem!
Really interesting! SMB financing need to be solved with a technology solution that can vastly decrease the cost and increase the speed of doing due diligence, so I totally see how Capital Float makes sense. That said, there is a more general need for better SMB financing even in the US, do you think their model could work in the US? What adjustments would it need?
Great post Karthik!
Certainly the process by Capital Float is more efficient than traditional banking. Nonetheless, I wonder how and when these new lending models could reach enough trust in order for regulators to allow them to accept deposits (at a low cost of capital). Meanwhile, it is a difficult situation because the cost of capital used (in this case VC money) is much higher than the traditional banks cost of capital (deposits).