Katrin Herrling co-founded Funding Xchange in order to help small businesses access the myriad of finance options available to them. She talks to Andrew Saunders about her own experience with bank funding, the importance of tech and what the future looks like for business finance…
THE FINTECH sector may be no stranger to refugees from banking or consulting seeking a better way to do business, but ex-dairy farmers are rather less frequently encountered in the fashionable workspaces of Shoreditch.
In fact, FundingXchange chief executive and co-founder Katrin Herrling has been both consultant and dairy farmer at the same time. Before she started the small- and medium-sized enterprise (SME) finance comparison site, she spent seven years with management consulting giant Bain providing strategic advice to the senior leaders of major banks across Europe, whilst also helping to run the family business, a dairy farm in Ireland’s County Wexford.
But for all her financial expertise, it was a formative experience as an SME customer at the hands of a big bank that inspired her to start FundingXchange. In 2010, shortly after the financial crisis, she recalls having a meeting with the farm’s bank. Despite the business having been a customer for decades and having been an excellent risk over that time, it was not a happy encounter.
“I was sitting in front of a banker who told me that the terms we had been accessing as a business customer for over 20 years were just going to disappear, and that from now on my cost of credit was going to be three times as much as it had been,” Herrling explains.
“Nothing had changed on my side, only on the bank’s. I walked out of that meeting thinking that even though I had worked with all the major commercial banks in Europe, I had no idea who was going to fund my business. I was also thinking that if someone like me had no idea where to turn, that suggested a real problem.”
One person’s problem is another’s opportunity of course, and so the idea for FundingXchange came about – a one stop shop where small business owners can find quick, jargon-free and accurate advice on all the funding options available to them, just as consumers can compare mortgages, credit cards and insurance bank accounts, online and in moments.
“Look at what has happened in consumer finance – you can compare and access the product you want almost instantly,” she says. “Why doesn’t that work in the SME world? It’s because SMEs are more complex to understand than consumers.”
It’s a fair point: a sole trader turning over £50,000 with a few dozen local customers is a very different kind of risk to a firm with sales of £20m, 50 employees and customers all over the world – but they are both SMEs. Historically that heterogeneity has made it hard for lenders to assess large numbers of individual businesses and has led to situations such as that experienced by Herrling, where entire sectors are effectively treated as the same, usually high, risk.
“Friction is widespread in the system, and it comes from the lack of visibility around the performance of a business,” she asserts. “If you want to reduce the friction it’s all about having access to live validated data that tells me how a business is doing.”
That’s the essence of the deal that FundingXchange offers its customers, she says. “In return for providing access to that data, we provide them with offers from lenders, and give them control over which lenders they choose to work with.
“We’re entirely impartial as to which lender a customer uses. We have exactly the same terms with all of them,” she adds. “We just care about having accurate information from our lenders as to who they want to fund, what terms they can provide and how quickly they can help businesses.”
In the early days, Herrling and her co-founder Olivier Beau de Lomenie – the man behind Ocado’s e-commerce platform – made plenty of mistakes, one of which in particular turned out to be a vital insight in disguise.
“We started off giving product advice but we soon figured out that business owners don’t think like this,” Herrling recounts. “They don’t understand the difference between asset finance and invoice finance, or what a credit line is.”
That’s because, she says, in the sub-£2m turnover market where most of their customers are found, businesses don’t have a dedicated finance person. The owner does it, and owners may be passionate about many things – employees, customers and products – but they are not usually finance experts.
“Finance is what happens after eight o’clock at night,” Herrling comments. “The way a business owner thinks about it is ‘I need money, I need this amount for this long’ and usually they need it quite quickly.”
So, they dropped all the product jargon and instead simply presented customers with all the available funding options in one place. It was harder to do, but it was what the customer wanted.
“You don’t care how the deals are packaged, you just want to know how much money you can borrow and on what terms,” Herrling explains.
The other thing that the customer wants is certainty – or as near to it as can be managed. Gaining provisional acceptance only to be rejected further down the line by a chosen lender is a big issue for comparison sites generally and SME ones in particular. Herrling explains that they have been working hard on their ‘match rate’ ever since the business got going in 2015.
“We measure how many of the customers we introduce actually get funded each month, and every time we try to improve the ratio,” she says. “It’s what our customers expect and it’s why we have made a huge investment in technology.”
Key to that tech is a platform that can reflect as closely as possible the decision-making processes of FundingXchange’s 45-plus lending partners. These range from traditional banks like NatWest, Lloyd’s and Alllied Irish Bank, through to challenger banks like Metro and fintechs including MarketInvoice and Iwoca. They all have different lending profiles, products and target customers to be factored in.
“What we have cracked is the ability to hold enough of the underwriting models of our lenders to be able to give our customers personalised terms,” she says. “Noone else has done that.”
It wasn’t easy to persuade lenders to part with such vital commercial information as their underwriting processes, she admits, but once they started to see the results coming through lenders became more trusting. “Now we have several lenders that provide their decisioning completely within our platform, so you have certainty that you will be funded,” she adds.
The result of this combination of tech focus and strong partner relations, claims Herrling, is a class-leading performance. “We know from our lenders that where we have optimised for them, our close rate is four times higher than that of our nearest competitor,” she says.
“It doesn’t necessarily work as well with larger deals but it does for volume lenders who have a rigorous understanding of their risk appetite.”
As well as lenders, the business also partners with commercial and government bodies to help it find more customers. Key commercial partners include MoneySuperMarket, for whom FundingXchange provides price comparisons for SME customers.
Another major commercial partner is Sage – FundingXchange is integrated into Sage’s popular SME accounting software and this is an area of the market that Herrling expects will only become more important as technology takes off.
“In the near future I believe that small businesses will engage with their finances largely through cloud accounting solutions,” she predicts.
“So we are a price comparison site at the moment but we will be migrating over time to get closer and closer to helping businesses manage their finances.”
The provision of these so-called intelligent financing products and services will depend on the much-discussed developments in Open Banking. Open Banking will allow SMEs to grant secure third-party access to their bank account records, enabling – in theory anyway – a whole raft of new AI-powered, mobile-friendly financial services for entrepreneurs.
Many eager fintechs have expressed disappointment with the rate of progress in Open Banking legislation, but Herrling – who knows from her time as a consultant how slow banks can be to change – thinks otherwise. “It’s a critical infrastructure piece and the fact that the UK has made it happen in the time it has done is beyond astonishing,” she says. “It’s easy to criticise but the reality is that the speed with which Open Banking was delivered is like overnight.”
On the government side, FundingXchange is one of three platforms – the others being Funding Options and Alternative Business Funding – designated by the British Business Bank to take part in the Bank Referral Scheme.
Every SME turned down by a regular bank is referred to the designated platforms, and 902 loans worth a total of £15.6m have been funded between the scheme’s inception in 2016 and the second quarter of 2018. This equates to a conversion rate of about 10 per cent of referred SMEs which applied for an alternative quote.
Those figures may be fairly modest, but each loan is a business funded that would not have been otherwise. The scheme is working better for FundingXchange than for the other platforms, says Herrling. “We have done 50 per cent of the closures [for the total scheme] over the last year, it’s as simple as that,” she claims.
Taking a broader view of how the sector might develop in 2019 and beyond, she has concerns that some smaller niche lenders might be pushed out by the scale of the biggest alt-fi beasts. “I think the scale and automation of the market could be of detriment to smaller, more innovative lenders,” she says.
“We are seeing the emergence of a small number of very well-funded players, that can buy market share even if their products are not the best available.
“That’s why we charge the same commission to all our lenders – I don’t think it’s the right thing to give customers only to those businesses who can pay the most for them.”
Although she carefully avoids making any definitive predictions, it’s also pretty clear that she is expecting the UK economy to take a turn for the worse sometime soon. “We are sensing a shift when it comes to borrowing,” she states. “There has been less appetite to invest for growth over the last three months, while defensive borrowing – borrowing to shore up the business – is on the increase.”
But if another downturn is on the way she believes that the diverse range of alternative lenders – and peer-to-peer platforms in particular – will help to keep the vital supply of business credit flowing, should bank lending dry up again.
“It’s what we saw in the last downturn and the response from P2P was highly effective,” she comments. “Having P2P as one of a range of safety valves is definitely not a bad thing.”