Ensuring seamless cash flow for companies

KredX, a technology-driven invoice-discounting marketplace, reduces the payment cycle for businesses

This year’s Diwali was relatively tension-free for Vinay Holliday, who runs a garment manufacturing firm named 4 Creations. The Bengaluru-based company that sells garments to large brands usually gets paid in 90-120 days from its customers. However, this year, the company raised about 70 per cent of the invoice amount it had raised on brands from investors on KredX through discounting and ensured that its employees were paid salaries in time for Diwali. Bengaluru-based technology start-up KredX, which recently raised $6.25 million in Series-A funding round led by Sequoia India, is an invoice-discounting marketplace. Invoice discounting allows businesses to take loans against receivables for a fee.
 
Concept

Invoice discounting has been in existence in India since the medieval centuries. In simpler terms, it translates into the ‘hundi’ markets quite popular among the local mandis. This huge financing segment is, however, highly unorganised, not governed by any regulation and is mostly driven by peer-to-peer relations. KredX wants to change this by bringing in more transparency by backing it with technology rather than emotions.
 
The company, a brainchild of Indian Institute of Technology Kanpur and Stanford alumni Manish Kumar, Puneet Agarwal and Anurag Jain, started operations in 2015. Kumar had been working for more than a decade in banks and Jain was into real estate business. At one point, the latter was having invoices that were not getting paid on time. The fund crunch was accentuated by banks that declined loans. “This got us into thinking why don’t we develop something around one of the basic problems faced by all the businesses in the country,” says Kumar, who is also the chief executive officer. “Invoice is an asset for the SMEs (small and medium enterprises); it’s a financial paper. Why not sell this asset at a discount and raise capital?”
 
Business model
 
Investors – who could be individuals, corporates, banks or non-banking financial companies (NBFCs) – connect with the SME that has listed its invoice on the platform. To bring in more credibility, KredX currently allows only vendors who are clients to blue-chip companies –companies listed anywhere in the world or private companies with more than Rs 2,000 crore in turnover – to be listed on its platform. The start-up has a few hundred vendors across sectors. “What we mostly look for in a vendor is cash flow,” Kumar explains.
 
Once a vendor shows its desire to be listed on KredX, the latter checks the vendor’s CIBIL score and bank statements, apart from conducting mandatory know-your-customer and physical verifications. To minimise the exposure to fraudsters, KredX also gets a confirmation from the blue-chip company that the invoice is a genuine one. However, the platform does not reveal the name of the SME to the investor, but will rather provide only the details and profile of the company.
 
“Initially, there was scepticism on how can the concept of ‘hundi market’ be brought in through technology and data,” says Kumar. Gradually, individual investors were on-boarded, followed by NBFCs and then banks. According to Kumar, KredX has a few hundred investors but not even one has opted out till date. KredX earns money from a fee charged on each transaction from both the investor and the SME.
 
Opportunities
 
Invoice discounting acts as an alternate investment platform for investors. The market, valued at $100 billion, is largely untapped in India.
 
For retail investors, it is a short-term investment cycle where the money is compounding at a rapid pace, while being immune to stock market fluctuations. For vendors, too, it comes at an advantage because they do not need collateral or commitment. “What we want to bring in is democratisation of financing for SMEs. From a regulator’s perspective, we’re trying to add on to the priority-sector lending in the country,” Kumar adds.
 
The 25-member company is seeing a 20 per cent growth month-on-month in terms of trade. It has sold more than 3,000 invoices at an average ticket size of Rs 20 lakh. KredX, which has been in its revenue phase since the start of its operations, looks to become profitable by mid-2017. The team, initially boot-strapped, is currently backed by Sequoia India and Prime Venture Partners. The recent round of funding will help the team scale up the team and invest more in technology.
 
“KredX is disrupting a huge multi-billion-dollar informal lending market for businesses all across India using technology, and thus allowing under-served SMEs to access credit from private and institutional lenders, typically 60-90 days in duration. The company neither assumes credit risk nor has a balance sheet and that makes it akin to a pure marketplace,” says Shailendra Singh, managing director, Sequoia Capital India Advisors.
 
Mumbai-based Creditmonk also offers similar service but is a tad different. Unlike KredX, Creditmonk works on a rate and review basis, where the creditor rates the payment habits of customers and on the basis of which, loans are given. Better funding will bring in more players into the space, says Kumar.
 
Road ahead
 
According to Kumar, the start-up is in a steady growth phase. “We want to continue growing in a similar manner. Disruption in this space cannot happen overnight,” he adds. KredX may come out with more offshoots of the same product offering in the near future. However, for 2017, the focus is to move towards profitability and expand the team.
 
Fact Box

Area of business: Invoice discounting

Year of inception: 2015

Founders: Manish Kumar, Puneet Agarwal and Anurag Jain
.
Funding: $6.25 million in Series-A from Sequoia India and Prime Venture Partners

Profitability: Aims to break even by next year

EXPERT TAKE

KredX is in the invoice-discounting space where banks have been the traditional players. Over the years, banks used to make decisions on credit discounting depending on the amount of money they have in store. Going ahead, we’ll see a lot of players emerge in this space. Invoices generated can be a source for your working capital. Players such as KredX are going to be major game-changers because companies also see these as an alternate source of funds.

They are going to be the new marketplaces where you have NBFCs, high net worth individuals and others who want to go ahead and receive a return in the short term. 
 

Invoice discounting is a 30, 60 or 90-day cycle, and the typical rate of discounting is around 20 per cent. Currently, the legitimacy of invoices is still a doubtful area, but here KredX is doing due diligence before onboarding the invoice or a vendor on the platform. Banks will start feeling the heat with the goods and services tax opening up next year.

With that, the whole invoice-discounting space is going to become hotter. KredX is in the right space in terms of the problem it is solving because the SME segment has traditionally been under-served. One potential threat will be the RBI’s Trade Receivables Discounting System, a similar platform in the space. However, the KredX model is a bit different and it is an open platform. 

(Praveen Hari, fellow, iSpirt, a software product think tank)