The pandemic has propelled faster growth of e-commerce companies and startups over the past couple of years, many of whom search for new funding and payment options to enable more sustained long-term growth regionally and internationally. Investors have poured $36.3 billion into Asian startups in the first three months of 2022, according to CB Insights. Besides raising funds from investors, there are a number of other ways these companies and startups are doing in getting the capital and strategic support to fuel their growth. And one of them is financing. I was asking Percy Hung of Choco Up to talk more about this.
As startups, cash and resources are always very tight. Knowing how to manage your cash flow and plan accordingly has proved to be one of the most crucial aspects of running a startup.
According to a report by US Bank, the overwhelming majority of small businesses, 82% to be exact, fail as a result of cash flow issues. That means the business had potentially achieved a successful product-market fit, was growing and servicing customers, and then all of a sudden, the company ran out of cash.
Hence, it’s important for any founders and business owners to carefully plan ahead their finances, but more importantly, locate the right funding partners BEFORE you need them because it will take time for due diligence and relationship building.
Startups can prepare themselves by locating funding partners. My suggestion is to do online research on various funding providers and the different options (e.g. debt, equity, hybrid) and also reach out to your friends and network, the local startup community, and government resources.
There are many solutions out there that can cater to your business’s needs, but make sure to do your research and also reach out to people who have done this before to get a clearer picture of your funding options
For some businesses or startups, financing can be challenging to secure, as many do not have adequate assets to serve as collateral to secure bank loans. Would there still be a way that these founders can secure financial backing somewhere, what’s your take on this?
Absolutely, new-economy businesses operate very differently from traditional businesses. They tend to be asset-light, with short operating history, yet growing rapidly. Many banks and traditional lenders do not know how to assess these types of companies, as their growth drivers and business health are different from traditional businesses in many ways.
In recent years, the emergence of alternative lending providers has begun to serve these customers. With an intimate understanding of how online businesses work, coupled with plentiful alternative data, these providers can confidently underwrite these companies to provide the financing these new-economy businesses deserve.
In your opinion, where the latest financing trends in Asia are going?
Asia is going through a digital transformation at an incredible speed. Thanks to the convenience and efficiency created by the internet, many businesses are doubling their size in a matter of months, not years. While this is super exciting to see, oftentimes, businesses have working capital and growth capital needs.
Many traditional financiers are seeing where the world is going and are adapting new technologies and practices to serve these customers. Yet, traditional lenders still tend to be quite slow-moving due to legacy and regulatory issues, and that creates a huge vacuum in the middle for companies who deserve funding but face challenges in doing so, resulting in a trillion-dollar funding gap in Asia.
Many alternative lending fintechs have emerged, catering specifically to the latest and groundbreaking businesses. Traditionally, financing has always been an offline and manual process. With data and technology, financing has become much easier and faster to assess and deploy. In the next decade, we foresee the financing landscape to be quicker, more seamless, and more automated. It would no longer be a tedious and slow process, but a founder-friendly solution to getting capital, so owners can focus on building their companies.
Do you see the same trends happening on the other side of Asia, too, as in the Middle East and Central Asia?
We definitely see a similar kind of technology revolution happening. The US leads the way when it comes to new business models, including alternative financing. Now we see this trend coming to the rest of the world, and it’s exciting to see how companies can grow rapidly when they are able to get the right types of capital, at the right time. However, it’s important to note that different parts of the world have their own technology integration, customer value-adding needs and ways of business. It is, therefore, imperative to recognize localization is often key to penetrating a new market and building a presence.
Percy, how many financing models are really available out there?
There are so many financing models out there it’s hard to put a number to them, such as inventory financing, invoice financing, buy now, pay later, term loan, revolver, mezzanine loan, convertible notes, director’s loan, revenue-based financing, preferred equity, common equity. They are all different and cater to different needs and situations.
Tell us in more detail about what RBF or revenue-based financing is all about and how it works.
Sure. Revenue-based financing (RBF) is an alternative financing model in which companies raise capital based on future revenue. RBF platforms put up funds for companies’ growth in exchange for a regular share or a certain percentage of the recipient companies’ revenue. This arrangement continues until the pre-agreed amount is repaid in full. Typically, this amount is the capital plus a flat fee.
With a revenue-sharing arrangement, RBF platforms effectively offer protection against the risks of business investments. If revenue performance is good, the repayment amount in that particular month would be higher, meaning that the funds will be repaid over a shorter timeline; but if revenue performance is mediocre, the repayment amount would be lower, spreading the repayment over a longer horizon.
Traditionally, debt and equity financing are two major ways to raise business capital. These two funding methods, however, come with significant drawbacks.
Business loans are not easy to secure. Lengthy application forms, tons of paperwork and endless email correspondences – the sheer thought of these probably gives you a headache already. But the application doesn’t end here. Creditors would look at your company’s track record, credit history and other factors to determine whether a loan should be granted. The approval process could take months. Some lenders even require the pledging of assets as collateral.
Thinking of raising funds from venture capital firms or angel investors? With all the outreach efforts and investor pitches, equity financing could be equally burdensome as debt financing (if not more so). Besides, you will have to give up a portion of equity and/or control of your business.
The third option, revenue-based financing, combines the most favourable features of debt and equity financing while eliminating the major drawbacks of both. Running a business inevitably involves the ebb and flow of finances. Revenue may shoot up in one month and drop in the next. In times of uncertainty, it could be daunting to have fixed loan payments (plus interest) hovering over your head. The conventional approach to paying back loans may even inhibit growth. Equity financing, on the other hand, may not be a desirable option given the need for shared ownership. If that is the case, revenue-based financing would be your best pick.
Let’s talk about Choco Up. What is it all about and what makes Choco Up different from other alternative financing solutions for e-commerce companies and start-ups?
Choco Up is dedicated to providing a flexible, non-dilutive funding solution which allows businesses to grow now, pay later. As a revenue-based financing platform, we provide growth capital for fast-growing startups, small-and-medium businesses, as well as e-commerce companies, enabling them to leverage the funds to grow and scale, then pay back through a small portion of their revenue.
Through revenue-based financing, Choco Up has helped companies in more than 15 markets and 15 sectors to scale their businesses without the need to dilute equity or borrow expensive loans with stringent terms. Even though our core product is revenue financing, our goal is to help you grow as fast and as large as possible because your success is our success (no, really – you will become a great case study for us and also repay faster).
Thus, we have built two value-add products, the first of which is the Choco Global Business Account, partnered with Airwallex, and the second, Choco Payment, partnered with Stripe. The first enables our clients to collect and disburse money globally cheaper and faster, and the second enables our clients to accept online payments from more than 135 currencies across 180+ countries. In addition, we have built a partnership network where we offer bundled solutions with our certified partners to help our clients increase revenue, lower cost and reduce risks – such as digital marketing, logistics and fulfilment, and SaaS tools.
We noticed that Choco Up is powered by machine learning and its data-driven platform. Can you tell us more about this and how both are supporting your operations to help e-commerce companies and startups?
By leveraging cloud technology and big data, Choco Up has devised a straightforward process for startups to access quick financing. Many of the digital merchants Choco Up works with are cloud-native and/or are operating on cloud-based commerce platforms and payment gateways such as Shopify and Stripe. After signing up to receive funding, they authorize Choco Up to access their store data—such as sales volume and average order value—through a direct application programming interface (API) plugin on Shopify or the e-commerce site they’re using.
With the power of near real-time data processing, Choco Up can make a preliminary offer of funding as soon as a client completes their application. A full offer is typically generated within the hour, and funds are released in as little as 24 hours. On the other hand, companies typically have to wait at least three months for approval and funding when applying for financing with a bank. This is a key differentiator for Choco Up, as access to quick capital, even relatively small amounts such as $10,000, is crucial to online merchants’ ability to run marketing campaigns during peak periods such as Black Friday or Cyber Monday.
Additionally, Choco Up prides itself on its lack of bias in credit decisions. “In today’s day and age, a lot of things happen virtually, and we don’t necessarily meet clients face to face, so we rarely rely on relationships or “gut feeling” like traditional institutions do. As a result, we can underwrite objectively and look at each store from a pure performance perspective,” says Brian Tsang, co-founder and COO of Choco Up.
After data passes through Choco Up’s data warehouse and before a final funding decision is made, it runs through AI and ML models to help the credit risk team perform further validations. Credit underwriting is a never-ending process because you can never be too careful. With the increasing use of AI and ML models, we can process much more data, structured or unstructured, in a meaningful way.
In general, what makes a financing application easily approved by Choco Up?
The more data you have, the better. We have built data integrations with major sales, marketing, payment and accounting platforms, and that’s where we analyze data and underwrite credit with our risk models. We are looking for companies with established products, consistent revenue and growing demand.
How should e-commerce companies and startups reach out to you?
They can find us on LinkedIn or our website!
Any parting words Percy?
There is nothing more fulfilling than seeing our clients achieve success because of our funding and growth solutions. We have helped hundreds of clients so far, but that’s just the beginning. Our mission is to help a million asset-light businesses grow 10x and, along the way, be able to provide support when they need us the most. If you have any questions, don’t hesitate to reach out to us! We are also actively hiring across departments, so if our mission resonates with you, reach out to us as well!
. . .
The more you read, the better it is. Subscribe for more marketing and business insights.
