FinTech Intel spoke with Rob Straathof, chief executive officer at Liberis, to discuss why small businesses can struggle to access funding through banks, and how embedded finance is changing the lending landscape
Its chief executive officer, Rob Straathof, tells FinTech Intel why small business can struggle to access funding through banks and how embedded finance is changing the lending landscape.
Can you tell me about yourself and Liberis?
I have a background in running small businesses, I started my first business with my brother in the Netherlands in 2003 in B2B catering. After a career in finance, in 2015, we came up with the idea of embedded business finance through partners.
We wanted people to avoid having to go into a bank branch or go on an online journey that asks you lots of different questions and requires you to upload loads of information.
We thought that, based on the information that many small businesses or platforms already have out there, for example with Barclaycard, Klarna or Worldpay, we could use that for underwriting.
And the resounding answer was yes. Over the past eight years, we have built it out to 26 partners across 10 countries.
We have served more than $1b of funding to businesses. The best part is, on average, a small business grows about 20% faster versus the businesses that don’t get funded.
We create better businesses, faster growth, and the survival rate of businesses that get funding is 25% higher over 3 years.
This has a real tangible impact on the economy. For every pound we lend out, about £1.5 is created in net economic value.
What I’m really proud of is that we have saved and secured more than 100,000 jobs in the UK economy over the past eight years.
The biggest testament I got over the last few years was a personal note on LinkedIn from a business owner, who said you didn’t just save my pizza place during the pandemic, you made sure I could feed my kids. And the six employees we have, can also feed their kids.
That gives me the warm, fuzzy feeling and is why I actually run a company like Liberis.
Why do small businesses struggle to access lending through traditional banks?
It’s three things. The regulatory model and capital allocation, banks’ archaic underwriting model, and their unwillingness to take risks on future cash flows.
We underwrite future cash flows and purchase future cash flows at a discount. Banks have a ‘computer says no’ kind of response as they are bound by archaic underwriting processes.
It should be noted here that banks aren’t wrong when they see that small businesses have a high default rate in most countries.
Unfortunately, due to a host of regulatory impacts, the way that banks work and the way their regulatory capital works, it is very unprofitable for them to lend to small businesses, versus for example, a mortgage or a consumer loan.
The capital allocation is a bit broken and means banks withhold from making small businesses a fair offer.
If a person is declined a loan from a bank, which is 50 to 70% of the time or higher in some countries, they don’t go any further and become permanent non-borrowers.
How does your platform help?
We work with big brands and under their brand name, we offer small businesses funding.
We can do this because we have better access to data. We have a highly sophisticated, fourth generation machine learning algorithm that forecasts someone’s cash flow. And the accuracy is stellar.
We can provide better funding in pockets of opportunities that banks don’t like, such as a loan that doesn’t have assets behind it or a hotel where they have peaks and lulls in their income.
That’s why small businesses are better served through embedded finance players like us than they would be with a bank loan or the open market.
A small business will see a small widget on their Klarna or Worldpay dashboard, that says they are approved for £20,000 of working capital, “click here”.
This takes away the fear of applying and fear of rejection, as they have already been pre-approved, and the process takes as little as four clicks and three minutes!
How is embedded finance changing the way legacy banks operate?
I like to use Uber as an example of embedded payments. You get into the car and your payment is already being processed in the background, so the driver knows you are good for your money. Everything is frictionless.
In a similar way with embedded lending, we integrate with partners, so it’s there at the point of interaction. It’s convenient, pre-approved and frictionless.
The whole benefit is that it’s so much easier. People can focus on running their business rather than spending three weeks applying for a loan.
Last year, we received an investment from Barclays. It sees the opportunity that embedded finance provides to its customers.
We not only serve Barclay card customers, but Barclays also sees the opportunity to go wider and integrate with multiple platforms and players.
Barclays funds SMEs through our platform, on its own balance sheet. We fund for Barclaycard, where Liberis takes the first loss on top, and Barclays has the exposure to small businesses in a much more capital efficient way than normal lending directly, via small business loans.
It brings the best of both worlds, from the capital efficiency and customer perspectives.
What does the future hold for Liberis?
Post-pandemic, Liberis has seen a huge increase in partnership requests. We have at least a dozen new partnerships in the pipeline. We will keep expanding.
Last year we grew by 150%. It is a booming market and things are expanding very rapidly, with new products, into new countries and new partnerships.