Part A: Case study – Iwoca
Part A of this TMA will be marked out of 80 marks. Your answer to this question should be no more than 1000 words.
Read the case study and answer the following questions:
1. Iwoca’s stated mission is to ‘to make financing available to a million customers’. Drawing on evidence from the case study evaluate their mission statement against the ‘six successful tests of a mission statement’ (Wilson and Gilligan, 2005). (30 marks)
2. What might have been the advantages and disadvantages to Iwoca in raising investment through family and friends as opposed to other forms of finance? (25 marks)
3. Describe five external business environment challenges which might affect Iwoca’s business model. (25 marks)
Struggling to get finance? I know just how that feels
Christoph Rieche is the boss of Iwoca, a lender that believes simplicity is the way to help small businesses
Eight years ago, Christoph Rieche decided to give up a plum role at Goldman Sachs to start a small business lender. It gave him an instant insight into exactly the kind of problems that many of his intended customers were facing.
In need of capital to offer to prospective borrowers but without the track record to secure wholesale finance, Mr Rieche turned to friends and family. “I started by tapping mates for about £20,000. Then the loan book was growing, so you need more. There would be that look in the eyes, don’t f*** it up.
“I had a family member who said, ‘I’ll give you £100,000, but I need it back [soon] because I’m buying a house.’ I thought, ‘If I screw this up and they can’t buy their house, it will be dreadful forever.’ ”
It hasn’t been dreadful. Fortunately for Mr Rieche and his benefactors, Iwoca, his company, has made such progress that it relies on institutions including NIBC Bank and Shawbrook Bank for its capital. And from the germ of an idea, Iwoca has grown to lend more than £1 billion to nearly 30,000 small companies.
Other aspects of the business have changed remarkably little, not least Mr Rieche’s outlook since he founded the business in 2011 with James Dear, a former Deutsche banker.
“We saw that small businesses have an acute challenge accessing finance, which means a big drag on productivity in the UK and other economies. That thought, which made me start the business, is still what gets me out of bed today. We want to be that bridge so that the business owner can sleep better.”
According to banks, small business lending has been muted since the financial crisis because there is a lack of demand. They cite surveys suggesting a long-term trend towards companies wanting to expand under their own steam rather than take on debt.
The message appears to be: “We’re making money available. It’s hardly our fault if entrepreneurs don’t want to borrow it.”
Mr Rieche, 39, begs to disagree: “[Since the crisis] there’s been growth in consumer finance and corporate finance and a contraction in small business lending. Something doesn’t add up.” He believes that businesses do want credit if it’s made simpler to find, apply for, secure and pay back. “Do banks make finance easily available to small businesses? If you don’t market loans properly for long enough, naturally after some time people don’t think about it and decide that it’s not for them.”
A typical Iwoca customer has been running for fewer than five years and is looking to borrow about £15,000. Its loans are unsecured. The London-based company started life by offering credit to eBay traders. Since it could see their selling data, credit decisions could be made swiftly, without the delays and paperwork associated with applying for a bank loan.
It was, Mr Rieche says, an “underserved and misunderstood market. In 2011, if an ecommerce merchant went to a bank and asked for a loan, the bank thinks, ‘I can’t believe you are doing this for a living’. ” An expansion into the broader economy began in 2014 via technology that reads applicants’ bank statements to make rapid credit decisions for short-term loans. Think of it as an alternative to the humble bank overdraft, something that small companies in their early days often find hard to secure.
This year Iwoca claimed that the number of new credit facility approvals that it was responsible for equated to 12 per cent of the British small business overdraft market. Yet Mr Rieche believes that the business has “barely scratched the surface” of where he wants it to get to. “Our mission is to make financing available to a million customers. That’s the north star.” Does that seem ambitious? “It’s a large number. We’re meant to look at that and say, ‘There’s a long way to go’.”
The company does appear to have a relatively solid base to build upon. Unlike peers including Funding Circle, the listed peer-to-peer lender, Iwoca is in the black, returning a maiden £1.4 million profit from sales of £48 million last year
“We’ve kept a balance between investing in growth while keeping our marketing spending very disciplined. You can lose a lot of money if you run off chasing growth.”
Iwoca Pay, a new invoice finance service, launches next year, while a more conventional business loan that doesn’t require a personal guarantee will follow in 2021, the result of a £10 million grant from a Royal Bank of Scotland fund designed to boost competition in business banking.
Further expansion will come from technology that allows third parties to use Iwoca to offer loans to their customers. For example, customers of Tide, a digital bank, can apply for an Iwoca loan without leaving Tide’s app.
Customer trading data from such partners should mean that credit decisions can be made without the borrower having to do much in terms of an application. Mr Rieche thinks that this concept, which he calls “open lending”, could allow Iwoca to get in front of two million small and medium-sized companies.
“Traditionally, a company like us has very limited reach through traditional marketing channels. To get small businesses to borrow, you have to take it to the places they’re already at so they stumble across it and think, ‘Yes, why not?’”
Iwoca offers a different approach to the high street banks that dominate small business finance, but Mr Rieche is no fan of the “alternative” tag that lenders like his company have been given. “I want people to say Barclays, Lloyds, HSBC, Iwoca. I don’t want to be an alternative.”
‘I didn’t even consider approaching a high street bank for a loan. There was no chance’
Cecilia Downer decided to set up her own business, Nails and Cocktails, after poor service at a nail bar (James Hurley writes). “They rushed us in and out. I thought I could do better.”
Ms Downer, 38, decided to open a salon offering nail and other beauty treatments that also would serve drinks, providing a more fun and relaxing experience for clients.
She generated demand with a blog offering beauty tips and was soon being told to hurry up and get the venture up and running. Based in Chingford, northeast London, the business opened its doors in late 2017. When it needed furnishings, Ms Downer didn’t even consider approaching a high street bank for a loan. “There was no chance. Even opening a bank account was difficult.”
She found Iwoca via an internet search and applied for about £3,000. “It looked simple, straightforward, saying you could borrow within 24 hours. We did. It was smooth and easy.”
With that loan paid off, she hopes to return to finance an expansion to a site in Tottenham. In the meantime, she is running the company, which has four staff, while working as an operations manager for an accountancy firm. “I have a vision for an empire. I have to hustle hard. Can’t stop, won’t stop!”
Christoph Rieche, the co-founder of Iwoca, says that helping entrepreneurs such as Ms Downer is much more rewarding than his former life as a Goldman Sachs banker.
“I was keen to have an impact at the individual level. If you give a small business owner finance, it is quite different from helping someone like Nestlé. “You can help them hire, grow and ultimately have a big impact on their life and their family’s if the business can do better.”
