Through its Reverse Factoring solution, ECap is set to disrupt the way banks finance SMEs to encourage the flow of liquidity
Established in 2015, Ennovative Capital (ECap) is a financial technology (Fintech) company that leverages technology to solve working challenges for businesses in Kenya and Africa at large.
The company was started principally to address a specific need in the market. “A key challenge facing many Small and Medium Enterprises (SMEs) in the country is cash constraints as a result of delayed payments from goods supplied,” says Kefa Nyakundi, managing director at ECap. The SMEs supply large corporate buyers in the market, but they are not able to get funding to facilitate the supplies.
In regards to this, ECap has introduced an innovative solution that will see suppliers of corporate institutions receiving payment for goods and services offered, without having to wait for the stipulated credit period. It means that suppliers can use receivables from the corporate clients to access funding as opposed to borrowing. This creates a great impact in the economy for SMEs who would have ordinarily waited for 90 days to be paid, or who would have gone to borrow very expensively from money lenders.
“Our flagship product is the supply chain finance or reverse factoring,” says Mr. Nyakundi. It involves using the credit worthiness of the buyer, who is the bigger party in the transaction, to enable SMEs access funding. “Reverse factoring is something we’ve been pushing the market to embrace because we believe it is going to disrupt the working capital finance for SMEs,” offers the managing director.
By its very nature, reverse factoring requires significance liquidity, and partnering with Commercial Bank of Africa (CBA) provided ECap with the best go-to market strategy. CBA is the leading innovator in the market, and it fully understood and grasped the opportunity. The African Guarantee Fund (AGF) on the other hand came on board as a financial guarantor. It means that if the buyer does not pay on maturity of the invoice, the financing entity does not lose 100 per cent. That allows money to flow and pricing to be maintained at a reasonable level.
Other solutions on offer include receivables finance, working capital analysis and asset based lending. ECap is also innovating to bring about LPO finance to enable suppliers to get funding before delivering goods or rendering services.
Commercial lending space
The recent time is characterized by the rise of Fintechs that are disrupting different areas including lending and access to information. Most of the Fintechs known in the market place are disrupting the consumer financing space, where they are lending between Ksh. 1,000 and Ksh. 30,000.
ECap is however operating in the commercial lending space. “For the economy to feel the effect of Fintech, we need to go to commercial lending,” says Mr. Nyakundi, adding that, “Our idea is to disrupt the way banks finance SMEs to encourage the flow of liquidity.”
According to the managing director, the company has a product that will enable many SMEs to get liquidity to enable them trade and grow. He says that in finance, profit is never the real issue, the real issue is cash. You can be a very profitable business, but without cash to pay your overheads, the business can close down.
“We are participating in a space that is adding value.” Statistics show that, in countries such as Mexico, large scale adoption of reverse factoring could result in the growth of gross domestic product (GDP) by three or more digits, since you are injecting liquidity into the economy. This allows SMEs to have greater access to working capital, especially those supplying to local and national government as they take long to pay.
Data driven lending
For a long time, it has been a requirement for borrowers to walk into a bank for assessment prior to accessing credit. Currently however, most banks are going digital.
In the same vein, financiers are doing behavioral as opposed to transaction based lending. Mr. Nyakundi notes that when you use behavioral data, there are predictive analytics that will reveal if a borrower has a high probability of defaulting.
Data driven lending is something that has been adopted in the developed world. The managing director therefore encourages lenders to use data to manage their credit assessment.
Like any other business, especially startups, the main challenge is raising capital. ECap has however designed innovative products and gotten support from investors who see the value proposition. The company has teamed up with big parties in the market such as CBA, AGF and International Finance Corporation (IFC).
“We have also been forced to use our own money to do public sector work, for instance, educating the market on the products, despite there being many development institutions mandated with such roles,” reveals Mr. Nyakundi.
ECap is also using expensive international technology, and they are required to pay a license fee even if they are not trading.
In spite of these challenges, the company has a young, vibrant and knowledgeable team. This coupled with extensive experience gained over the three years and a solid foundation, means that ECap is set to scale up.
Mr. Nyakundi says the future is bright and believes in the next two to three years, they will be at a level where they can get funding from the capital markets through securitization of the receivables. This is when the real game will begin!
ECap also plans to expand to the East African region and it’s already in talks with parties in the region including Uganda and Rwanda.
Furthermore, the company hopes to be a significant player in helping SMEs in the market place. “In the next five years, we believe we will be the market place for working capital,” says Mr. Nyakundi. It means any SME that has provided value or has such opportunity can actually walk in and get funding, provide the service and make some profits.
“One of the disruptions we are hoping to create in the market is bringing as much liquidity as possible to finance the opportunities presented in the supply chain.” Globally, some of the biggest players to finance that opportunity are funds. Therefore, we are trying to find an opportunity to work with the pension fund industry, which is controlling very large chunks of money that should be invested in opportunities available in the market.
As a Fintech, ECap plans to create an opportunity for pension funds where they can invest in short term corporate debts, and have an asset class called a receivable. This will in turn open up the space for financing working capital to larger players such as banks, high net worth individuals, and the pension fund industry among others, and eventually bring down the cost of borrowing for SMEs.
Mr. Nyakundi however appeals to policy makers and development finance institutions that have more patient money to partner with them to help the many SMEs who supply government both at the county and national level.