In most African countries, access to credit remains limited for many small businesses, with the reasons ranging from the inability to pay collateral and lack of credit history to unfavourable lending criteria and high-interest rates.
Banks and governments have tried to address this gap across different African markets by implementing several loan initiatives, but there’s still enormous work to move the needle. In South Africa, where the annual SME credit gap is about $20 billion, according to the International Finance Corporation, fintechs such as Lulalend are pulling their weight by providing varied loans to underserved small and medium-sized businesses.
To carry on with its effort, the digital lender, launched in 2014, has raised $35 million in a Series B round led by international impact investor Lightrock, with participation from new investors, including the German development finance institution DEG, Triodos Investment Management and Women’s World Banking—alongside lead investors from its $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 internal 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 obtain working capital. Lulalend claims that based on these credit metrics, it can distribute funds in hours instead of weeks or months, which is typical with traditional lenders. It has disbursed billions of rand to small businesses across South Africa, the company said in a statement.
While fintechs commonly set out with unbundling financial services to differentiate themselves from banks, they often rebundle with models akin to banks during growth stages. For Lulalend, the idea to introduce customers to additional financial services was formed during the pandemic, according to Lulalend CEO Trevor Gosling. Businesses couldn’t undertake bank visits to open accounts or perform transactions, which made a stronger case for digital banking locally and globally evident in the fintech boom of 2021.
The digital lender now offers its customers Lula, a credit-led neobanking solution — in partnership with pan-African bank Access Bank — which they can use to open bank accounts. The thinking is that with bank accounts, businesses can access other perks, including cash flow management and faster access to capital.
“We had more time to think about how to engage with our customers and understand their needs and problems and eventually realized that access to credit is just one of the big parts we can be doing for our businesses. So we went down the road of building our digital bank,” Gosling, who co-founded the startup with CTO Neil Welman, told reporters over a call. “Also, we know businesses need cash flow management and so we’ve broadened our horizon from just access to funding to how we solve end-to-end cash flow.”
Most businesses accessing Lulalend’s offerings via mobile or web apps still use other bank accounts to receive loans because the neobanking platform is in beta and only available to about a hundred testers for now; more than 20,000 businesses on its waitlist could access it next month.
“If someone banks with us, we have access to their transactional data, which we can score regularly, pushing funding offers to the client base. We also give them tools that can accurately show where their businesses are at any point, projections, make payments, and all of that,” Gosling added.
Over the past three years, Lulalend embedded credit solutions into partners such as telecom operator Vodacom, fintech Yoco and e-commerce giant Takealot as part of a credit distribution strategy that seemed to have had some success. Construction, retail and hospitality are some sectors whose businesses use the platform to get bridge financing, revolving capital facility, equipment financing, inventory finance and trade capital.
In 2019, these clients accessed loans ranging from $1,500 to $70,000 for 6-12 month tenors with a 2-6% interest. But the company now offers between $250 to $300,000 worth of loans for 12 months with a 1.5-3% monthly interest. The digital lender, which has distributed “hundreds of millions of dollars” in loans, claims its non-performing loan ratio is about 4-5%.
“We’ve been able to embed credit solutions utilizing our technology into partners to help them scale, which has also been a large part of our growth,” he said. “We’ve also worked with them to understand their SME bases and consider how we service them. So that’s been a big component of our business since our Series A raise that has helped us significantly scale distribution efforts.”
Similar business banking providers in South Africa include TymeBank. In other parts of Africa, YC-backed Prospa, Float and Brass are a few examples. According to Gosling, what differentiates Lulalend from others is its speed and turnaround time in disbursing loans and 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 book, 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 funding goes to the digital bank’s rollout, including marketing. And then to bolster our balance sheet, strengthen our balance sheet; with the $35 million raised, we can raise over $200 million in debt and bring it on our balance sheet to fund our markets,” said the chief executive on Lulalend’s next efforts.