Bridging the financial gap for small business owners in Africa

Mercy Corps Ventures, the venture capital arm of Mercy Corps, invests in startups building climate resilience and financial resilience for communities across the world. We’ve supported 32+ ventures to scale and raise over £93 million in follow-on capital. Read on to learn about the role our ventures play in building a world where everyone can prosper.

“For emerging markets, access to capital should be fast and seamless. However, that is far from reality on the African continent,” says Uche Nnadi, Co-Founder and CTO of Payhippo. Digital tools are improving the speed and ease with which credit can be disbursed, and Payhippo has arrived to do just this, specifically for small and medium enterprises (SME) in Africa. Their lending platform uses technology to assess the cash flow needs of a business and monitor capital usage, ultimately, delivering loans to small businesses significantly faster than other digital SME lenders. 

Market need

Access to credit is a critical enabler for the growth and development of small and medium enterprises. The SME credit market, however, is notoriously characterised by market failures and imperfections. In emerging markets 55–68% of formal SMEs are either unserved or underserved by financial institutions, leading to a total credit gap of ~£3.6 trillion according to CGAP. In Nigeria specifically, 22% of the country’s 41.6 million SMEs identified obtaining finance as their biggest challenge in PwC’s 2020 survey, with less than 5% ever borrowing from banks.

This funding gap exists in part because current institutions do not have the tools to appropriately score and profile small businesses, and given their size and geographic diffusion SMEs are not cost effective for banks to go after. Emerging fintech startups and alternative lending institutions have attempted to fill the access to capital gap but their market penetration remains low due to high costs of capital, lengthy processing time and cost, and unsuitable loan tenures. But the timeliness of money is vital, particularly on short-term working capital loans which are used for inventory, inputs, salary shortfalls and other short term cash needs. When deployment is delayed enterprises often fail to utilise lender capital effectively and thus default on repayment. This often plays out when there is a mismatch between the financing solution and the financing need — for instance, a SME obtaining a 2–5 year term loan to service an intermittent 30–45 day working capital need would mean that the SME gets charged interest even when said capital is not being put to use.

The Payhippo solution

This is where Payhippo comes in. The company aims to fill the SME lending gap in the Nigerian market and across Africa by leveraging technology to identify key growth areas for small businesses, match them with the right type of capital, and provide timely financing. Payhippo’s loan offering starts with short-term affordable working capital, delivered within 30–45 days at a 6% interest rate, which is significantly lower than the consumer digital lenders such as Branch and Tala. Referred to as the ‘Command Centre’, their suite of tools and machine-learning enables them to effectively fulfill enterprise loan requests within three hours compared to other digital lenders who can take up to three weeks. Two key components of this tool box are their Bank Statement PDF Parser, which allows them to assess a businesses cash flow needs and monitor capital usage very quickly, and Buy Now Pay Later, which allows SMEs to buy inventory and goods from larger enterprises now, and repay Payhippo later. This improved access to finance for a traditionally underserved group enables business survival and growth, job creation, and improved livelihoods.

“We created Payhippo to make sure small businesses can get funding that works for them. Working in fintech small business lending, we saw that lenders in Nigeria didn’t have the technology to lend to small businesses, instead using manual operations. Ultimately this hurt the small businesses, as they would wait for weeks to get loan offers even when promised a 24 hour turnaround. Our solution provides on-demand financing for SMEs in Nigeria. This solves working capital needs and allows these small businesses to start building their Payhippo credit scores,” says Zach Bijesse, Co-Founder & CEO of Payhippo.

Investment rationale

In the digital lending space, there are a number of fintechs that claim to provide capital to SMEs but in reality are more focused on the consumer side of the market. While Payhippo isn’t necessarily a first mover, their innovative application of machine learning is fulfilling SME loan requests at speed, a crucial factor for this market segment. They have identified, and are poised to fill, key gaps in existing approaches and have made extremely fast progress; in just over a year since launch, the company has already issued 2000 loans with an average repayment rate of 97%. Since our investment, Payhippo has successfully raised an additional $2m in equity capital and mobilised a robust pipeline of lending capital to serve Nigerian SMEs. We are excited to back this amazing team as they, in their own words, are driven to “create a more financially equitable Africa.”