Small businesses often don’t need that big a cash injection to get to the next level of growth – but they often need it quickly. This can be a cumbersome process for a big bank, whose manual processes means it can be tricky to make a call on a loan to a microbusiness, especially if it’s on the back of a sparse trading record.
The promise to fix this problem is what’s propelled London tech startup Iwoca (stylised “iwoca”) into a leading next generation fintech lender. Iwoca, short for “instant working capital”, launched in 2012, and has spent the past five years developing its own technology solutions to fix the problems plaguing small business finance. Keen to see the Iwoca method in action, I’ve come to the company’s offices in London’s Soho. Iwoca is proud of its customer feedback: they’ve pinned a myriad of reviews to the office walls – even the bad ones, although I’m assured their TrustPilot rating is excellent.
“Small businesses usually want to borrow small amounts of money for a short time,” says Colin Goldstein, Head of Strategic Partnerships at Iwoca. Especially since the financial crisis, the smaller businesses have struggled to access the finance they’ve needed to grow – this is what Iwoca is here to fix. To date, the fintech startup has lent over £170 million to more than 8,000 businesses, who’ve received an average of £14,000 each. The goal is to service over one million business within a decade, as Iwoca aims to expand its presence to cover all of Europe.
Iwoca isn’t really here to displace an existing player, Goldstein explains – the customers are often companies which wouldn’t be able to access finance any other way. Insufficient access to funds means small businesses are extra vulnerable to cash flow problems, leaving them to rely on friends, family, overdrafts and credit cards. Iwoca isn’t so much a loan as it is a revolving credit facility – customers can choose how much to draw down at a time. While there’s a minimum repayment schedule, there are no penalties for early repayment.
An intuitive application system
To give me a better idea how it works, Pierce Glennie, Chief Marketing Officer of Iwoca, takes me through a standard customer journey. He signs up at iwoca.co.uk as if he were running a small business selling office furniture on eBay, coming to Iwoca to apply for £10,000 so he can buy extra stock in bulk to get a better rate. First the web application asks him for the type of business, and each answer changes the nature of the questions coming next. “In a typical bank process, a lot of this data just gets lost as they tell their relationship manager but it’s not noted down in a formal way and doesn’t go into the system. That means it never affects the bank’s scorecard,” says Glennie. “It makes it difficult [for banks] to take in this fairly soft, intangible data, but it’s incredibly important – risks do vary between an Italian restaurant and an Amazon retailer.”
Glennie tells the system that he’s been trading between one and two years – banks typically need two years of trading data before they will lend money. “Most of our customers would have six months or so [of records], but we sometimes lend to a brand new startup based on the business plan.” Usually this means they can have £10,000 to start, with the option to increase the amount as they have more trading data. Glennie inputs his company’s turnover, and explain that the system will now run a live search at Companies House and add any extra data from there. This allows background checks to be completed quickly, so a risk score is already starting to form: “It means that if someone has an issue, we can give them live feedback on how likely they are to get approved. … Banks [often make you fill in everything] and it goes into a black hole before you get any feedback.”
Anyone can apply to Iwoca – it’s an open web platform. But out of the businesses that complete their applications, 60-70% are approved. The final step of Glennie’s demo is to link his eBay seller account – eBay’s open API makes this relatively easy. Rather than asking people to do the hard work of gathering the data, Iwoca makes a point of doing this work on their behalf whenever possible. Another benefit of linking everything up like this is that it keeps the data fresh, whereas audited accounts are often 15 months old.
Bank statements are tricker – they usually have to be submitted on PDFs – but Iwoca has developed software to scrape data according to the formats for each bank. Companies can also link to their accountancy software data, although Iwoca will work with companies preferring to stick to paper and pen as well: “We make our technology work around how the businesses choose to operate.”
Iwoca has established partnerships with Commerzbank, the Royal Bank of Scotland, and NatWest, which will refer customers to Iwoca if they cannot service them. It’s not that traditional banks are reluctant to work with these small companies, explains Glennie – it’s usually a case of legacy systems making it difficult to enable this kind of data sharing. Iwoca’s approach lets them pull together the myriads of data formats that don’t easily fit: “We’re not going to sit back and wait,” says Glennie. “Our approach is to think about the challenges where you have a mass of data that may have come in an inconvenient format, and use our technology to make it fast to process.”
A fresh take on risk
We’re at the end of the demo – it should take about an hour to get an answer for this kind of application. To show how that part of the process works we make our way to Nick the credit analyst, who takes me through a couple of real customer applications. Nick brings up an application from a small business that sells on Amazon. They’ve linked their Amazon account as part of the application process, so we can see what their sales look like over time. “It’s a new business, but we can see the sales are growing month by month,” says Nick. “We can also see the actual [Amazon] account, with customer feedback etc. Even though it was a new business there was no problem getting this approved, as we could see potential.”
The Iwoca credit risk method has over 60 criteria, and it’s constantly growing. Some are obvious (credit rating, customer feedback) and others less so – like looking at whether the IP address matches the trading address. Iwoca has also discovered other interesting correlations, such as the fact that using Google Analytics is a positive attribute. The customer may not realise they’re providing this information – all they did was input their web address. Glennie explains they have found a correlation between modern websites and strong companies, as well as the fact that the best e-commerce companies have social media accounts.
Each customer’s score for each of Iwoca’s criteria shows on the screen as a red or green bar, so any major dealbreakers stand out immediately. This enables Iwoca to get a quick read on whether it’s a good or bad application, whereas banks could spend hours going through piles of paper before seeing something that would call the whole thing off. Nick shows me a second customer application, this time from a company which experienced a delay from its biggest customer and needed a short term cash flow plug. This company was established enough to qualify for a bank loan, but that would have taken longer – Iwoca had the cash transferred in two hours. This was after a quick analysis of their bank statements, using a method that highlights keywords and allows the credit analyst to search for patterns.
Iwoca raised £46 million in new funding last October, in a Series C round consisting of £21 million in investment led by Prime Ventures, and a £25 million debt facility from challenger bank Shawbrook. Asked if Iwoca would consider licensing this software to banks, Colin Goldstein says it’s not designed for licensing: “But we’re having discussions about providing it as a service – not just the software, but the whole underwriting and decisionmaking process as a service.” They’ve already shown the system to half dozen major banks, adds Goldstein: “Without exception, they’ve all said that this is years ahead anything they have.”