In most African countries access to credit remains limited for many small businessesreasons ranging from the inability to pay collateral and lack of credit history to unfavorable lending criteria and high interest rates.
Banks and governments have tried to address this gap in various African markets by implementing various lending initiatives, but there is still a huge amount of work to get the needle moving. In South Africa, where the the annual credit gap of SMEs is about $20 billionaccording to the International Finance Corporation, fintechs such as lolling pull their weight by providing varied loans to underserved small and medium sized businesses.
To continue its efforts, the digital lender launched in 2014 raised $35 million in a Series B round led by international impact investor Lightrock, with participation from new investors including German development finance institution DEG, Triodos Investment Management and Women’s World Banking—alongside lead investors from the $6.5 million Series A round: The International Finance Corporation (IFC) and Quona Capital.
The Cape Town-based startup uses an online application process and in-house credit metrics — a proprietary credit scoring algorithm and a diverse set of alternative data sources — to provide short-term loans to small and medium-sized businesses that are often unable to find capital. Lulalend claims that based on these credit metrics, it can distribute money in hours rather than weeks or months, which is typical of traditional lenders. It has paid out billions of rand to small businesses across South Africa, the company said in a statement.
While fintechs usually start by unbundling financial services to differentiate themselves from banks, during the growth phase they often rebundle with models similar to banks. According to Trevor Gosling, CEO of Lulalend, the idea of introducing customers to additional financial services arose during the pandemic. Businesses were unable to make bank calls to open accounts or transact, making a stronger case for local and global digital banking evident in the 2021 fintech boom.
The digital lender is now offering its customers Lula, a credit-based neobanking solution – in partnership with pan-African bank Access Bank – that they can use to open bank accounts. The thinking is that companies with bank accounts have access to other benefits, including cash flow management and faster access to capital.
“WWe had more time to think about how to interact with our customers and understand their needs and issues, and eventually realized that access to credit is just one of the most important things we can do for our businesses. So we went on to build our digital bank,” Gosling, who co-founded the startup with Neil Welman, told londonbusinessblog.com during a call.
“We also know that businesses need cash flow management, so we’ve broadened our horizons from just accessing finance to how we solve end-to-end cash flow.”
Most businesses that access Lulalend’s offerings through mobile or web apps still use other bank accounts to receive loans the neobanking platform is in beta and for now only available to about a hundred testers; more than 20,000 companies on the waiting list can access it next month.
“When someone banks with us, we have access to their transaction data, which we can score on a regular basis, pushing financing offers to the customer base. We also give them tools that can accurately show where their business stands at any given time, make forecasts, make payments and all that,” Gosling added.
Over the past three years, Lulalend has embedded credit solutions in partners such as telecom operator Vodacom, fintech Yoco and e-commerce giant Takealot as part of a credit distribution strategy that appears to have had some success.
Construction, retail, and hospitality are some industries whose companies use the platform to get bridge financing, revolving capital facility, equipment financing, inventory financing, and trading capital. In 2019, these clients were able to access loans ranging from $1,500 to $70,000 for terms of 6-12 months with interest rates of 2-6%. But the company now offers between $250 and $300,000 in 12-month loans with 1.5-3% monthly interest. The digital lender, which has made “hundreds of millions of dollars” in loans, claims its non-performing loan rate is around 4-5%.
“We’ve been able to integrate credit solutions into partners using our technology to help them scale, which has also been a big part of our growth,” he said. “We have also worked with them to understand their SME base and think about how we can serve them. So that’s been an important part of our business since our Series A raise that’s helped us scale distribution efforts significantly.
Similar business banking providers in South Africa are TymeBank. In other parts of Africa, YC-backed Prospa, Float and Brass, among others, offer corporate banking services. What sets Lulalend apart, according to Gosling, is the speed and turnaround time in disbursing loans, opening a bank account and providing constant support services to its clients.
The capital raised will enable Lulalend to increase the size of its loan portfolio, bring new solutions to market and invest in the technology and talent to accelerate the rollout of the company’s new digital business banking platform.
“Much of this money will go towards the rollout of the digital bank, including marketing. And then to strengthen our balance sheet, strengthen our balance sheet; with the $35 million raised, we can raise more than $200 million in debt and put it on our balance sheet to fund our markets,” the CEO said of Lulalend’s next endeavors.