Old May Not Always Be Gold

Like most college friends, Ankit, Murthy and Kumanan lost touch with each other soon after graduating. Unlike most friends who lose touch with each other, they ran into each other while vacationing in the same resort at the same time to celebrate new years’ eve. While their career paths had diverged 15 years out of college, they were soon reminiscing the good old days with an equally old bottle of scotch. After rewinding and replaying the past a few times, the conversation caught up with time and they started talking about work.

After several years of working in a traditional bank, Ankit got bored and joined a new age digital lending company as the head of credit. Kumanan worked at large garment manufacturing units in India, Bangladesh and China. Watching the industry disappear around him, he sensed opportunity and had recently started his own T-shirt design and manufacturing company where he was riding the e-commerce boom and sold most of his inventory online. He had ambitions of starting his own brand soon. Murthy had joined his father’s business and expanded a single department store into a chain across the entire city. He also supplied snacks, beverages, toiletries, cleaning equipment to the largest software company of his city and they were constantly demanding that he supply paper, ink and most other consumables as they grew and expanded.

With the scotch taking care of any and all inhibitions, Murthy and Kumanan’s frustrations surfaced and they started talking about how they love their work, the sense of independence, the sense of control over their destiny but how they absolutely hated dealing with lenders and banks. In their mind, Ankit personified this opaque, insensitive, slow lender and they wanted him to explain why all their past loan and credit card applications had been declined. The barrage of questions targeted at Ankit reached a point where Kumanan even wanted Ankit to explain why his voter ID had the wrong address! Ankit smiled and surprised them by saying he shared their frustration of being unable to provide the right loan to the right person at the right time in his old bank and that he also moved to a new age digital company with the intent to redefine lending in India.

Ankit then asked Kumanan and Murthy to explain how they went about getting a loan and got the answer he expected. Like most business owners, they did not have the time to deal with multiple banks and they used an agent to help them get loans. While they did not particularly like their agents, they did send a guy over to their office to fill forms, collect documents, organize bank discussions and get them their funding without them having to figure out every bank, product and process. In addition, Murthy and Kumanan both had multiple suppliers who they had worked out individual credit terms with. They also admitted that whenever they needed urgent money or large sums that banks would not provide, they got it from local moneylenders at exorbitant terms. It was quite beyond them as to why a bank would think they cannot repay a larger loan when they were clearly taking multiple loans and successfully paying them off.

Ankit explained that traditional banks and lenders had very limited scope for loan officers to think out of the box and act beyond established policies.  Banks did not have significantly different products or processes and ended up providing 2-3 year lump sum loans that were not large enough for Kumanan or Murthy.  They always ended up spending time allocating money across various activities such as expansion, payroll, supplier payments, seasonal demands, online vs offline sales where payment cycles were vastly different. The advantage of Ankit’s new age company was three fold: custom products designed to address specific financial needs of businesses, high speed customer experience with minimal documentation, and low pricing due to product features that enable non-conservative underwriting. Kumanan and Murthy’s curiosity was piqued and they wanted to know more.

Ankit asked Kumanan to imagine a world in which he downloaded a mobile app, added all his suppliers and had a line of credit with standard terms available that he could use to pay any supplier any time. He could pick his repayment period and the payment goes through immediately! No need to haggle with each supplier and the credit line grew with usage and regularity of payments. Since he sold online, he also had the option of picking a tailor made e-commerce loan where repayments were mapped to the payment cycle and a transparent cash flow control mechanism ensured that many more people qualified for affordable large loans. These loans even adjusted themselves for seasonality of his business and he could request top-ups as and when he needed them. Kumanan was very impressed that these products were not restricted to his imagination but were actual products that Ankit was able to provide via his new age digital lending company.

Murthy wanted to know if there was something for folks like him who did not sell online. Ankit told him that instead of taking long term loans that may not be utilized all the time but keep accruing interest, Murthy should opt for an invoice financing loan wherein all his supplies to the large software company could be funded as and when they make a purchase from him. That way, he does not have to plan for their expansion and is confident of the right amount of money at the right time and the right rate. Murthy agreed that while this product did sound interesting, he preferred if somebody came to his office to explain the product and handle the paperwork. Ankit mentioned that his company did not have any “paperwork” since most customer information was collected digitally but he is happy to send over a person to Murthy’s office to help guide him through the product and process. Murthy then wanted to know why he could not get a larger loan and Ankit explained that lenders and banks are happy to lend when they have some visibility into the cash flow of a business. As an example, Ankit’s company had recently launched a merchant cash advance product that collected daily payments directly from the credit card machines that Murthy had in all his stores. Typically, it was a lot easier to qualify for such a loan, there was minimal documentation and there was no need to think about payment due dates!

Having given up hope of ever hitting the gym, Kumanan and Murthy were happy with their new year resolution of trying out custom financial products from new age digital companies and keeping in mind that old may not always be gold!

Tushar Garimalla

Tushar has deep expertise in credit, risk management, portfolio management and analytics gained during his 10-year career with HSBC and Capital One in India and the US. Most recently, he worked on a small business credit card portfolio purchase for Capital One including business development valuations, due diligence, system integration and credit policy development. Tushar graduated from IIT Madras with a B.Tech in Electrical Engineering.

Tushar heads Decision Sciences at Capital Float.