First Circle, a fintech startup enabling SME lending in the Philippines, has raised $1.3 million.
The capital was provided by Accion Venture Lab, which is attached to finance-focused non-profit Accion, and Deep Blue Ventures. First Circle raised $1.2 million last year, and it counts 500 Startups, IMJ, and Key Capital among its backers.
SME lending is a given in most Western countries, but the challenges are more acute in emerging markets where there’s a lack of data on customers and banks tend to prioritize larger, more established clientele where the risk is perceived to be lower.
Yet, SMEs represent a hugely important part of growing economies. In the Philippines, a Southeast Asia-based country with a population of nearly 100 million, SMEs represent 99 percent of all registered companies yet contribute to just 40 percent of economic output. Financing is a major issue, with SMEs accounting for less than 20 percent of all bank loans in the country.
That’s where First Circle, which was founded in 2015, is aiming to make a difference by giving less established companies the footing to grow their businesses at a more rapid rate.
“Lack of access to capital is a big problem that needs to be fixed. If it isn’t, millions of hardworking entrepreneurs and their businesses will not be given the chance to reach their potential,” First Circle co-founder and CEO Patrick Lynch said in a statement.
First Circle also made the processes more SME friendly, reducing the wait time, which can traditionally be as much as a month, to days and simplifying the paper trail involved.
To date it has paid out over $5 million in loans. Lynch told TechCrunch in an interview that the company typically provides $10,000 with over a payback duration of three months. Loans are underwritten by a credit pool supplied by a mix of asset managers and family offices, who take more than half of all earnings from the loan book, Lynch said.
“Often clients we deal with haven’t had access to formal credit,” he explained. “We’re not in the business of over-extending our clients’ loans, we look at what they can do now, such as customer numbers and transaction. Alternative information can come together to allow us to underwrite with a degree of certainty without traditional metrics.”
That typically means a successful loan applicant would need to show the potential to repay the loan. Since e-commerce is First Circle’s most common domain — it has an affiliation with Alibaba-owned Lazada, one of the services forecast to drive a boom in online spending in Southeast Asia — that might mean having an order of 3/4X the loan value coming in. That also helps to limit defaulting, with a usual worst case scenario meaning a client needs a little more time for repayment.
Lynch, who is Irish but moved to Asia to work with financial marketplace CompareAsia Group, said the company remains focused on the Philippines for now, but it is evaluating potential expansion options such as Indonesia or Thailand. He said he doesn’t expect to move into new markets before the end of the year, which is a rough timeline for when First Capital is planning a Series A round.
“We look at markets where there are low levels of SME financing, increasing e-commerce penetration, and sub-optimal availability of capital,” he said.