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SME lending takes a new avatar– purchase financing

The Week29 Dec 2017

It is the age of fin-techs. Fintech companies have disrupted existing models in the financial services industry – be it credit, personal finance or digital payments. Lending especially has seen a great deal of business model innovation, thanks to increasing usage of big data by these companies. But here is a fin-tech company, that is revolutionizing the SME lending space, not by pure-play lending but by lending them raw materials.

OfBusiness, a technology-driven financing platform is easing up the most crucial issue for small and medium enterprises – procurement of raw materials. The company issues credit lines to SMEs which they can use to buy raw materials on its platform. In other words, it helps them with “purchase financing.” Since raw materials form 60-70 percent of a SMEs cost, founder Asish Mohapatra saw it as an opportunity to build upon.

“Once funds are given, there is always a chance that it may be siphoned off or used for other purposes. And, considering that raw material procurement was such a problem area for SMEs, we decided to work on it,” says Mohapatra.

The way it works is – when an SME approaches OfBusiness for a raw material loan, the tech platform analyses the application and issues a credit line, say for Rs 50 lakh. The SME can now place an order for raw materials, say steel, worth Rs 40 lakh on the platform. The platform aggregates several such orders from SMEs all across and places in a large order to a manufacturer like the Steel Authority of India Limited (SAIL). Once the order is confirmed, the quality checked material is shipped to the SME with real-time tracking and delivery updates. The platform and SMEs benefit from recurring transactions and the end-use of purchasing credit.

Earlier, a small enterprise would typically go to a trader, because the order quantity would be small. The trader would keep a margin as high as 40 percent and the raw material would become expensive, for the quantity was small.

Here, traders are eliminated and because of the scale, the margins are 25-30 percent and the product also comes cheaper. The average credit limit given by OfBusiness ranges from Rs 30 lakh for unsecured to Rs 80 lakh for secured credit lines.

The company currently serves SMEs in the manufacturing and infrastructure sectors. Some of the raw materials it currently deals in are steel, TMT, cement, and polymers. The platform has so far served 7800 small and medium enterprises across India. Based on their contracts, SMEs have repayment cycles that extend up to six months.

Mohapatra says that OfBusiness has already achieved a revenue of Rs 220 crore in FY 2017) and is now targeting a Rs 750 crore turnover in FY2018.

The company has another platform called BidAssist which helps SMEs in finding applicable tenders.

“The BidAssist platform also helps us in lead acquisition and getting data about the SMEs. When an SME bid for a tender, a lot of operational data about the project that it has executed in the past or will execute in the future is collected. OfBusiness intends to use a lot of this current data to design bill discounting products more attuned to the nature of the ‘financial’ relationship between the SME and its customer,” says Mohapatra.

Till date, the startup has raised funding in three rounds. Apart from a debt funding round from Kotak Mahindra this year, OfBusiness raised $5 million series A investment from Matrix Partners India in February 2016.

Later in December last year, the startup secured another $11 million led by Zodius Capital and Matrix Partners. The company counts Patni Group’s Apoorva Patni, Ola co-founder Bhavish Aggarwal, Quikr co-founder Pranay Chulet and Limeroad co-founder and CTO Prashant Malik as its investors.