Online credit provider Iwoca is looking at raising the size of its loans and expanding into a new country on the back of a surge in demand for small business funding from alternative lenders.
Chief executive Christoph Rieche, who co-founded Iwoca in 2011, told City A.M. that the London-based fintech was “ready to take on another region as a new challenge”, having already entered the German market in 2015.
“It’s quite hard to lend in different regions, in the sense that it requires different data sources, regulation and laws are different, the mentality is different,” he said. “It’s very hard to just go to 15 different countries and say I’ll make all of those work.
“We’ve also been in Spain and Poland and decided that these were markets at the time that were not for us. Having said that, we’re now in such a good state.”
Iwoca broke its record for the volume of loans issued in the first quarter of 2024, providing more than £200m across 9,000 business loans in the UK and Germany, after a record full year in 2023.
The firm has lent more than £3bn to small businesses and raised over £1bn in debt and equity finance since it started trading in 2012. The latter figure was boosted last month when Iwoca secured a total of £270m in debt funding from firms including Citigroup and Barclays.
Rieche said Iwoca was “growing fast while also being solidly profitable and sustainable”.
“We have the people, we have the expertise, we have the capital,” he added. “So I think it’s quite likely that we might address another market in the next year or two – it might be earlier than that.”
Asked whether this market could be outside Europe, Rieche simply said “stay tuned”.
Big banks under pressure
Iwoca’s growth comes as small and medium-sized enterprises (SMEs) increasingly shun big banks for funding, having become plagued with the perception that they are deliberately pulling back from the sector.
Iwoca’s latest quarterly survey of SME finance brokers showed that while demand for small business funding was growing, nearly eight in 10 brokers believed high street banks were reducing their appetite to fund small businesses.
For Rieche, the retrenchment also creates issues for the UK economy given SMEs’ sizeable contribution.
“Every time we issue a pound, it results in about four pounds of GDP,” he said. “So we can really create quite significant economic growth by solving this problem at a larger scale.”
SMEs are requesting larger loans, with 28 per cent of experts surveyed by Iwoca saying the most requested loan amount in the first quarter was more than £100,000, up 56 per cent from the year before.
As it now serves a growing number of medium-sized businesses, Iwoca is reviewing “considerably” increasing its loan sizes. In 2022, the firm raised the maximum size of its Flexi-Loan product to £500k from £200k.
“There’s more demand than what is being served directly by the banks, and therefore businesses are looking elsewhere for solutions,” Rieche said. “We have also expanded our offering at the same time, so we’ve become more attractive to these types of customers.”
He added that Iwoca was focused on making its loan product “ever more flexible”.
“It’s not necessarily can we launch a new product, but constantly making eligibility criteria more inclusive, increasing loan amounts, increasing terms, testing around personal guarantees, debentures,” he said.
Tough competition
SMEs are increasingly turning to fintech alternatives for funding, with the likes of Iwoca, Oaknorth and Allica Bank booming in popularity and growing increasingly competitive in recent years.
Banking trade body UK Finance found in March that the majority (59 per cent) of SME lending came from outside the big banks.
Rieche said Iwoca’s “super automated” online platform set it apart from the competition. “I think we’re the only SME lender in Europe that can do fully automated end-to-end processing without a human being touching that small business at all,” he added.
But the risks of international expansion were underscored last week when Funding Circle, one of Iwoca’s main UK rivals, announced it planned to cut around 120 jobs in a bid to reduce costs – shortly after saying it would look to offload its US business.
“I’ve seen some winners and some people who weren’t able to find the right product market fit, didn’t get their lending quite right or didn’t get their customer acquisition right,” Rieche said. “I think you’ll see some more companies that try it but can’t make it work.”
He added that the firm’s business-to-business buy-now-pay-later product IwocaPay was “becoming ever more popular”, amassing more than 400 active merchants since launching in 2020.
“It’s smaller than our core lending business, but it’s starting to become a really material operation in its own right,” Rieche said.
“This market is definitely one to look out for. It’s just a few years behind the consumer world, but obviously B2B transactions themselves are a huge market – most of that is still going through invoices rather than ecommerce.”