Philippine startup bags $26m to expand loan business catering to SMEs

First Circle CEO Patrick Lynch (center, back) with the company’s core team / Photo credit: First Circle

Tight cash flow and lack of capital are the top reasons why small and medium-sized enterprises go out of business. First Circle, a startup launched in the Philippines more than two years ago, has raised US$26 million to offer SMEs much-needed financing to grow.

Venturra Capital led the series A round, with Insignia Ventures Partners, Silverhorn Investment Advisors, and Tryb Group joining in.

First Circle plans to use the fresh fundraise to branch out across the country, with an eye towards hitting other emerging markets in Southeast Asia in the near future. It’s also looking to increase its capital base to over US$100 million next year.

Using its own credit assessment process, First Circle lends to SMEs, which are often ignored by banks because they’re perceived to be a greater risk than large established firms. It offers purchase order and invoice financing, catering mainly to firms engaged in supply chains.

CEO and co-founder Patrick Lynch is an Irishman who moved to Hong Kong and then the Philippines to work for financial marketplace CompareAsia Group. “Building CompareAsiaGroup across Southeast Asian countries, I saw that SMEs were deeply underserved and realized that by putting access to financial services in their pocket, we would be able to open up a huge market and could build a huge business,” he says.

Since the beginning of the year, First Circle has lent US$75 million to businesses, with its non-performing ratio – the share of loans in default to total loans – at a low 1 percent. According to Lynch, the company manages soured loans by setting credit limits that grow only as customers prove they have the capability to pay back.

“We map borrowers’ trading relationships for size and diversity. This enables us to understand the strength of their cash flows,” he says of their assessment process. He’s keeping mum on revenue and other financial details for now.

What makes it unique

While First Circle has lending partners, it also lends from its own balance sheet, meaning it takes responsibility for the risk of loans defaulting. Revenue earned from the interest paid by borrowers is also split between the parties. That’s what makes First Circle different from peer-to-peer lending platforms where the loans come purely from third-party lenders.

“We share the risk and reward with our funding partners, which aligns interests for the long term. This is sustainable. Personally, I see economic winter on the horizon, and I believe that misalignment between P2P platforms and their lenders will cause many such platforms to fail in the coming years,” explains Lynch.

Because First Circle focuses on supply chains instead of targeting a wide range of customer segments, it acquires a wealth of data and information on borrowers in this sector, helping build its expertise.

The challenge for the company is ensuring a consistent customer experience amid increasing volumes.

A huge gap

First Circle’s new round comes as the Philippine government rolls out initiatives to champion SMEs, including fast-tracking a law that allows assets other than land as collateral for loans.

By some estimates, the credit gap in the Philippines’ small-business sector remains at US$50 billion, notes Lynch, citing reports by global and local financial institutions. A 2017 World Bank report also ranked the country as among those with the highest percentage of business owners borrowing capital from relatives and friends.