Small and medium-sized enterprises (SMEs) form the backbone of the Singapore economy, contributing to nearly half of the country’s GDP.

Yet, 81% of SMEs expect the overall size of their businesses to either stay the same or decrease this year, according to a survey by insurance firm QBE Insurance. Seven in 10 also stated a need for financial support in particular.

To help SMEs out, Singapore-based start-up Jenfi is offering revenue-based financing. It provides loans up to US$500,000 ($672,925) to businesses as a form of non-dilutive capital before taking a small percentage of future revenue instead of a fixed repayment schedule.

Jenfi was born out of the financing challenges and frustrations faced by its co-founders Jeffrey Liu and Justin Louie when they were scaling their previous business — fitness subscription company GuavaPass — before it was acquired by US-based fitness marketplace app ClassPass in 2019.

“One of the biggest challenges [GuavaPass faced] was getting access to growth capital,” Liu tells The Edge Singapore. When GuavaPass needed more funds to further fuel its marketing efforts to expand its membership base, it struggled to obtain the funds from traditional lenders even though it has proven to be successful with Facebook and Google advertising.

mute
“After selling the business to ClassPass, I realised this experience was universal among founders and business owners. At the same time, I knew there were many financial institutions that are interested in providing capital but don’t have the expertise to underwrite this new generation of technology and digital-native companies. It became obvious that this was a big opportunity, [which is why] I teamed with Justin to start Jenfi in Q4 2019,” he adds.

Shortcomings of conventional lending models

Why is it difficult for SMEs to get access to growth capital? Liu says conventional financial programmes, such as debt-financing, can be too taxing on small companies that do not want the burden of collateral or personal guarantees.

Old-school underwriting, which entails institutions or individuals to take on risk at a fee means that businesses might not qualify for enough credit even though they may be well-founded.
Jeffrey Liu, co-founder and CEO of Jenfi

He adds: "For instance, [digital-native] businesses may own fewer assets to put up for collateral and may not have the [minimum number of] years of audited financials that banks look for.”

Conventional lending models usually do not factor in how start-ups work too. “Old-school underwriting would regard start-ups in the growth stage as unprofitable because of their negative cash burn even though they could be contribution margin positive,” he adds.

“Additionally, start-ups tend to portion a significant percentage of their sales for marketing purposes, but banks do not factor in digital marketing efficiencies, such as Facebook or Google ad spend, in their assessments. Due to this increased perceived risk, banks would only offer loans if there was a personal guarantee, which is not an option most entrepreneurs would take,” says Liu.


See also: Huawei launches cloud support program for SMEs in APAC


In short, conventional lending models tend to be on the side of large corporations with years of built credit. This makes it challenging for smaller, newer companies that own less fixed assets and are more technology-driven to access loans. “They may not have enough on paper to secure a loan, or it just does not make financial sense to borrow at high-interest rates,” he adds.

Some traditional financing companies have made some improvements over the years. However, he notes that those changes are usually focused on “automating manual processes and do not necessarily translate to better underwriting and risk management”.

How Jenfi’s revenue-based financing works

Revenue-based financing helps SMEs and start-ups raise capital through investors who receive a percentage of revenue from ongoing activities. “This means that there is ‘skin the game’ where the royalties that investors earn have a direct relationship with how well the business is doing. [As for SMEs and start-ups,] this provides quick funding options as they scale their businesses through increased marketing, inventory and growth spend,” he explains.

Jenfi offers revenue-based financing — which the company terms as growth capital as a service (GCaaS) — by first integrating its platform with key services used by an SME. Such services include payment processors like Stripe, merchant platforms like Shopify and digital advertising accounts like Facebook Ads.

With access to the SME’s real-time financial data, Jenfi can assess the applicant’s financial health and business risk as well as predict sales and marketing efficiency before offering up to three eligible offers within 24 hours.

For instance, Jenfi can measure how effective the applicant is in buying Facebook ads to generate a sale. The higher the return on ad spend, the more productive the business becomes. A more productive business consumes less capital and becomes less risky, driving a positive virtuous effect that compounds over time.

As such, Jenfi can offer additional capital to SMEs and start-ups when they are at an inflection point and primed to take off.

Interestingly, Jenfi’s GCaaS solution allows it to provide funding with an agnostic lens as it looks at metrics that matter the most. Liu shares that there are many investor biases, such as over-optimism bias and gender bias.

“For example, there is a general perception that women are less serious about business ventures. This bias exists despite data suggesting that female entrepreneurs generated greater returns. According to research by management consulting firm Boston Consulting Group, for every dollar of funding, women-led start-ups generated a return of 78 cents, whereas male start-ups generate less than half that at 31 cents,” he says.

“[To provide a level-playing field when it comes to access to growth capital,] our credit underwriting and automated screening use AI and machine learning to remove human bias [and instead] evaluate businesses based on quantitative measures,” he adds.

Once the SME decides on the loan offer, funds are disbursed to a virtual Jenfi Wallet, which comes preloaded with a virtual Jenfi MasterCard. The MasterCard can be instantly activated and used for online advertising spend.

Jenfi’s variable repayment model ties the weekly repayment to a small percentage of the SME’s sales. Jenfi is therefore incentivised to ensure the SME’s business continues growing healthily as its success is tied to its clients’ business performance.

Fuelling the growth of local SMEs and start-ups

Liu says that the response to Jenfi’s unique financing model has been positive so far. It has serviced thousands of businesses across industries in Asia Pacific, especially those in the direct-to-consumer category. Some of its clients include Australia-based educational network A School For Tomorrow and Tier One Entertainment, an e-sports and gaming company in the Philippines.

“Since our launch in late 2019, the average Jenfi client has experienced a significant amount of compounded growth over time: +26.5% over three months, +60% over six months, and +156% over 12 months. The aggregate sales of funded companies are more than US$27 million, and we believe their capital will help companies generate an incremental US$58 million in sales, or a 156% increase, in the next 12 months,” he adds.

To help more SMEs grow, Jenfi will use the US$6.3 million it recently raised in Series A funding to further product development, customer acquisition, and expansion in Southeast Asia. Led by Monk’s Hill Ventures, the funding round was also participated by Golden Equator Ventures and Korea Investment Partners (via the GEC-KIP Fund), 8VC, ICU Ventures and Taurus Ventures.

Although Singapore is a well-established market, a significant number of local SMEs and start-ups are still struggling to gain access to growth capital as traditional financing methods are usually unfavourable to them. By democratising access to capital, Jenfi can help empower SMEs to focus on their core business and grow more confidently, ultimately propelling Singapore’s economic development.

Photo: Jenfi