Iʼll give you money to buy from me: how OfBusiness broke the profitability jinx in SME lending
The first 10 minutes have gone walking up and down the duplex office at Vipul Agora Mall in Gurugramʼs Sector 28, looking for an empty room where we could settle down for an interview.
“Sorry, I donʼt have a cabin for myself,” Asish Mohapatra, cofounder and CEO, OfBusiness, says with an uneasy smile, as he tries to get his hands on his business cards lying in one corner of a desk.
In just three and half years, Mohapatra and six others have built a company that financed INR1,530 crore transactions in FY19 alone from this not-so-cool office. What has worked for them is a unique business model: OfBusiness follows a marketplace model for supplying infrastructure raw materials to SMEs, and also lends to them for their purchases.
Back in 2014, when Mohapatra decided to quit his high-paying job as a director at Matrix Partners India to start out on his own, he didnʼt have a well-thought-out idea.
“I wanted to be an entrepreneur… I was looking after healthcare and consumer investments at Matrix. I realised if I donʼt do technology, I canʼt build a very large portfolio,” recalls Mohapatra. He went to Matrix co-founders Avnish Bajaj and Rishi Navani and told them about his ambition. “They agreed and suggested that I join any of their portfolio companies in an operating role.”
After evaluating seven companies, Mohapatra realised none of them would make money. He told as much to Bajaj and Navani. They asked him to do tech at Matrix itself. But Mohapatra had something else playing in his mind: “If I have to learn tech, why will I do it for you? I’d rather do it for myself.”
Mohapatra quit Matrix and started weaving the founding team for his own venture. The co-founders – Ruchi Kalra, Bhuvan Gupta, Nitin Jain, Vasant Sridhar, Srinath Ramakkrushnan, and Chandranshu – agreed “to join me without an idea in place. All we knew was that weʼll do something in the lending and SME space,” Mohapatra says.
It took them about a year to put in place a clear business model. OfBusiness was registered in August 2015.
Mohapatraʼs former bosses at Matrix Partners wrote the first cheque for OfBusiness.
Stand out from the crowd
In February 2016, when OfBusiness started operations as a marketplace for supplying raw materials to SMEs across infrastructure, manufacturing, and other sectors, it was only a portion of a bigger plot. The real story started unfolding when it acquired an NBFC licence seven months later.
This was the time when most B2B marketplaces were failing even after raising large funding rounds.
If the idea was to become a lender, why venture into a marketplace first?
“If you become a lender in the beginning, you cannot add the marketplace later. Because the customer sees you as a lender and it becomes difficult to sell more services on top. But, if the customer sees you as a service provider, you can always offer lending on top of it. Mahindra, GE, Ashok Leyland, Sundaram Finance are a few examples. New-age lenders find it very difficult to offer services because the service game is very different from lending,” Mohapatra says.
Under the NBFC brand, Oxyzo Financial Services, OfBusiness offers secured and unsecured credit lines to SME customers. “Our financing is only for raw-material purchase. Initially, we used to be a marketplace where financing was done via partnerships with NBFCs such as Aditya Birla, Capital Float, and Capital First. But now we are the sole lender on our marketplace,” Mohapatra says.
The company has disbursed INR3,200 crore of loans since inception.
Around 80% of the loans are used to buy raw materials on the OfBusiness marketplace, while the remaining is spent in buying from the open market.
“We give SMEs the option to buy raw materials from the open market if our prices are not good. Most of the time we are cheaper as we directly source the materials from the manufacturers. Nearly 20% of the time, we canʼt beat the prices [offered by the open market]. Since our credit line for SME customers is open for one year, they can just take the financing [any time],” Mohapatra says.
If a customer wants to buy from the market, they have to keep OfBusiness in the loop for a thorough KYC and onboarding process. OfBusiness will call the seller. Somebody from the team will meet them and collect the necessary documents. A proper scrutiny is done. The balance sheet is checked. A detailed analysis is done to ascertain whether the seller actually has stocks. This entire process takes half a day. If the seller declines to be on the OfBusiness marketplace, no transaction takes place.
To make the KYC process seamless and efficient, OfBusiness operates 14 offices, including two newly opened ones. Each office works only within a 200km radius. “We donʼt go beyond that. Which means no buyer and no supplier beyond 200km, thus making it tightly controlled,” Mohapatra says.
Because of the stringent KYC, the company sees 90% of its business coming from only 300 sellers in 12 markets. For 80% of the transactions happening on its platform, the fulfilment time is one and a half days. For the other 20%, where the SME is directly buying from the seller, the fulfilment happens on the same day.
“Without control, we canʼt have 6% RoI (return on investment), which is the best in the industry,” claims Mohapatra.
Cautious lending and lead sourcing
What differentiates OfBusiness from other SME-financing companies is its selective approach to lending. “We donʼt consider a customer who has less than INR5 crore annual turnover,” says Mohapatra. OfBusiness doesnʼt lend to retailors and traders. It only lends to manufacturers or infrastructure service companies of a minimum 10-year vintage. Startups are also a no-go area for the company.
OfBusiness offers a credit line of INR10 lakh-INR75 lakh. An SME can borrow at around 18%-19% rate of interest for a three-month tenure. Since the credit line is open for one year, the borrower needs to deposit a cheque once in six months for monitoring purposes (not underwriting). They canʼt take a fresh loan till the existing loan is paid back.
“We help our customers save on raw material because as a marketplace, we aggregate and pass on some of the margins to them. We directly source the raw materials from manufacturers and transparently pass on 50% margins to the customer. That way the interest rates become really cheap,” Mohapatra claims.
The active buyers base of OfBusiness with credit lines number 7,000-8,000, while the marketplace has 600-700 sellers.
To boost engagement, the company in 2017 launched BidAssist. Mohapatra says around 700,000 SMEs use this platform almost every day to search for tenders released by the government (road ministry or government agencies like NHAI/AAI), PSUs (all petroleum companies), and private companies (in which government has stakes). “The product is so popular that most of our customers call us the BidAssist company,” he says.
BidAssist acts as a lead-sourcing platform for OfBusiness. It scans tenders across 1,500 websites (almost 13,000 tenders are released in a day). SMEs can view all the tenders on the BidAssist app. The platform follows a freemium model. SMEs can fill in a few details and use BidAssist for free. But beyond a certain level one has to pay. This gives the company a lot more data on the users. For example, if they want to download a tender, they need to share information on the kind of SME they run, the raw materials they might be interested in, and their location.
In a few states, the company charges the users for tender downloading. “We charge SMEs in southern states because we started early there. North is new for us. So, we havenʼt started charging here yet,” says Mohapatra.
BidAssist, run and managed by just three engineers, is a selfsustaining business. It plays a marketing role for OfBusiness because “the app only runs ads of its own NBFC, telling users that there is this company that does raw-material financing and fulfilment”. The company claims that it doesnʼt market this product, which is growing organically 10% month on month.
OfBusiness doesnʼt have a customer-support team. Any lead that comes through BidAssist is passed on to the sales team, which meets the customer and pitches the lending product.
Growth at a cost
The ongoing liquidity crisis has hit NBFCs badly. Fintech lenders are bearing the brunt, too. Even if some of the NBFCs managed to somehow raise debt, it came at a steep price. Some even had to shut shop. Mohapatra claims the crisis did not impact OfBusiness much but made him cautious.
The company has raised around INR800 crore in debt till date and claims that it is currently raising INR100 crore-INR120 crore debt every month. In the past eight-nine months, it added 21 new creditors, taking total lenders to 30. This includes banks and NBFCs.
But the cost of borrowing has increased for OfBusiness. Earlier, the aggregated cost was 11.2%, which has now gone up to 12%. The company however claims this isn’t too damaging. “I have reduced the subvention. Earlier, I used to share 50% margin on raw materials with the customer. Now I share 5% less, which is still better than the market price,” Mohapatra says.
The companyʼs debt-to-equity ratio today is 3n1, which was at around 2n8 in FY19. “Our growth is high, our book size is growing at INR100 crore every month. If I want to go to 3n1, then I need INR25 crore equity. It is natural for us to raise more funding to grow more,” he adds.
Even if the numbers say OfBusiness is doing just fine, Mohapatra refuses to take it easy.
Challenge #1: managing liquidity. “We are not facing a liquidity challenge right now because this ALM (asset liability management) ratio is working for us, as we borrow for the short term and lend for the ultra-short term. The biggest challenge with this is, we used to plan with six months of cash, but now we have three months of cushion – which is too tight,” Mohapatra says. “The margin of safety has to improve.” Currently the company cannot go to mutual funds (MFs) and PSUs for money. “With the DHFL case a lot of MFs have burnt their fingers. So, they have shut the [funding] tap now,” Mohapatra says.
Challenge #2: how to add new services. The company started offering insurance two months ago in partnership with ICICI Lombard. It now offers a contractor risk insurance for a project.
The company is earning about 12%-13% margin on every insurance sold and plans to add general insurance in September-October. “Our aim is to make the interest rate cheap and earn money through subvention – just like Bajaj Finance has mastered. We want to make the interest rate negligible. The sellers can make up for the interest. For that, we have to add a few more services. What are those? How do we to add them? Thatʼs going to be a challenge,” Mohapatra says.
Challenge #3: low technology adoption in SMEs. Today, only 30% of the features on the company’s platform are easily used by the SMEs. For the rest 70%, they need handholding. “So, the challenge is how to make this [30% adoption] 70% because with that our cost of operations will go down. More important, greater use of technology will generate more data, on the basis of which new products and services can be built,” Mohapatra explains.
Mohapatra believes the current liquidity crisis is a kind of blessing for the industry, as it will stop a lot of indiscriminate lending that was happening in the past. He says financing is an industry that must balance demand with risk. Also, a lot of companies were raising massive rounds of funding in the name of technology and innovation and that used to spoil the balance sheet of the lender. According to Mohapatra, all the algorithms and new tech created in the market will be put to test in this down cycle.
“We use AI, automation, and we do apply algorithms. But algorithm don’t make money. Fundamental financial services have to make money. At the end of the day, you are here to make a fundamentally profitable business. A best business is one that funds itself,” he says.
Diversification? Whatʼs that?
At a time when major fintech companies are diversifying and adding new loan categories, OfBusiness aims to stick to what it is doing for at least the next three years.
“No one caters to the space we are in. We only compete with banks that offer cash credit. There is a huge gap [in bank lending] because they donʼt give 100% financing. We think this sector (lending for SMEs in the infra space) offers so much opportunity and nobody wants to look at this sector or are not able to do it because it is hard to penetrate. When we reach, may be, an INR8,000 crore loan book, then we could think of diversifying,” Mohapatra says. The company targets to achieve a loan book of INR1,500 crore in FY20.
But does the raw-material market have enough heft to create a SME lending and fulfilment behemoth? Yes, if one goes by the numbers.
- Steel, the biggest raw material for infrastructure and construction projects, is a USD80 billion industry.
- Aluminium, copper, and zinc together make for another USD30 billion.
- Plastic is a USD20 billion industry, paper is USD10 billion, diesel products USD40 billion-USD50 billion.
- SMEs consume at least 30%-40% of these materials, Mohapatra says.
“The issue is not the market size. The issue is, can you develop a compelling proposition for customers to, first, buy from you; second, take credit from you; and third, stay with you,” he says.
Isnʼt there pressure from investors to diversify or make some noise on valuation, etc.? “Not at all. All they expect is 25%-35% IRR,” Mohapatra says.
ET Prime reached out to Vikram Vaidyanathan from Matrix Partners, who sits on the OfBusiness board, for confirmation. Vaidyanathan says Matrix has a founder-first thesis. “Asish and I know each other for more than 13 years, we joined Matrix together. I was very excited about backing him. He is clearly the driving force, but it is probably one of the best founding teams that we have backed.
“We absolutely love the way they are growing without making much noise, and there is absolutely no pressure from us. Their conservative approach is liked by the financial-services ecosystem, and as a venture investor we [too] like this approach.”
OfBusinessʼs journey with Matrix will complete three years in December.
The company raised an internal round of around INR70 crore in March. It is in the process of finalising a fresh equity round of nearly triple that size. Mohapatra, along with his co-founder and wife Kalra, owns 34% stake in the company. “I am no longer an investor. I only invest in my company. Whatever capital I had, Iʼve used for buying shares here. I donʼt have any other investments, not even shares, mutual funds, or fixed deposits,” Mohapatra says.
“We want to remain invested and in fact we will invest more in the company. Our exit horizons are five to seven-plus years,” Vaidyanathan says answering a question on a possible exit.
Does the NBFC crisis worry Vaidyanathan?
“Itʼs a risk that we are underwriting at this stage. To say that the overall macro-economic outlook as well as the NBFC outlook doesn’t worry me would be wrong. Itʼs a risk for sure, but I think OfBusiness is building a very high-quality loan book and very high-quality partnerships. The fact that they are profitable makes them much more stable to absorb these short-term shocks than others.”
Mohapatra credits OfBusinessʼs hiring strategy for its growth. The 400-plus team mostly includes freshers from tier-II IITs and IIMs and professionals with experience of up to two years.
“We donʼt hire from the industry because we operate very differently from other companies both in financial services and fulfilment. When we take people from the industry, itʼs difficult to make them unlearn and teach them again. When people are fresh, they are easier to mould. To be honest, we canʼt afford top-tier IITs and IIMs. We want to maintain the layer of profitability,” he says. “For our North sales head [who is literally operating like a co-founder], OfBusiness was his second job and he only had one year of experience before joining us. Our COO Pratyush Nalla had just six months of experience, but he got four promotions here.”
The company – which claims to have lost not more than 30 people since it started – expects to become a 1,000-people team in the next six-eight months. An IPO is also on the cards.
“The IPO will come in two-three years. We are profitable. We have the leverage. A lot of new-age NBFCs donʼt have leverage and are essentially dependent on equity. We are not in the news because we have not raised more equity,” Mohapatra says.
He says many people in business are celebrated because they have scaled. But most of them havenʼt built a profitable business.
“In India, you canʼt do loss-making IPOs,” he says. “You need profit for long years and also banks’ backing, without which you canʼt run financial services.”