Iwoca hits profits as recession fears boost small firms’ demand for cash
Fintech lender Iwoca said it hit profitability for the first time in four years last quarter as small businesses scrambled to borrow cash amid soaring costs and a looming recession.
The London-based lender, which offers business loans of up to £500,000, said demand for cash from alternative lenders had been buoyed by high street banks’ fears of a wave of defaults as the cost of energy jumped and cash flows dried up.
“[We saw] a big boost over the summer, where I think we started seeing the effects of higher inflation and higher costs,” Christoph Rieche, Iwoca’s chief and co-founder, told City A.M. “It also means [small businesses’ customers started paying slower, because they’re withholding some funds to pay for the higher expenses. And so you have a double whammy that hits cash flow.”
Rieche said the demand had “accelerated” just as traditional high street lenders pulled up the shutters to smaller firms amid fears of defaults. Investment management firm Pollen Street Capital has now stumped up a further £45m to extend the Iwoca’s funding line to £175m and help it meet demand.
“Banks are retrenching, small businesses have a higher need for cash flow financing in the current economic environment, and all of this means that there’s more demand for finance coming to us,” Rieche said.
The uptick in demand comes after small business confidence in the UK collapsed in the final quarter of the year to depths on par with that measured during the second Covid lockdown.
A report from the Federation of Small Businesses last week found that SME confidence hit -46 points, the lowest such finding since the fourth quarter of 2020. Late payments from suppliers and a surge in utility bills were among the headline issues cited by small firms. Iwoca was yet to see a wave of defaults however, Rieche said.
“Since the Bank of England and other forecasters expected a recession, we’ve always expected that our loss rates would be above our model portfolio loss rates. And they’ve actually been consistently lower than that,” he told City A.M. “We haven’t seen any increased loss across the many 1000 businesses that have financing from us.”
Iwoca’s customer base, which skews towards the smaller end of the SME market, has swelled to around 90,000 firms since launching in 2012.
The fintech was among a host of lenders to be accredited as a coronavirus business interruption loan scheme lender during the pandemic, and was forced to broaden its reach into the mid-market to help dish out cash.
Iwoca said it has since expanded the range of its core lending product from £200,000 to £500,000 to meet the growing demand from medium sized businesses.