According to research, 85% of African SMEs have no access to finance, and thevery day, African SMEs have billions of debts blocked due to long payment cycles. This leads to cash flow issues that cause businesses to fall behind on major expenses and filling new orders.
Ghansah is a serial entrepreneur. Since leaving college in 2014, he has co-founded several tech startups, but made his mark globally with OMG Digital, a startup with offices in Ghana and Nigeria that wanted to become the ” Africa’s BuzzFeed ”. In 2016, OMG Digital was one of the first African companies accepted into Y Combinator.
Ghansah had a good journey with the company and left two years ago. For his new business, he focused on fintech outside of media. Formerly Swipe, Float is an 18-month Lagos and San Francisco-based company that aims to close the $ 300 billion liquidity gap for African small and medium-sized businesses. The company competed in YC’s Winter 2020 Lot, making Ghansah one of the few founders of YC twice in Africa.
Float has evolved since the last time we partially covered them on their Demo Day as “Brex for Africa”. According to CEO Ghansah, Float “rethinks the way African companies manage their financial operations, from managing liquidity and payments to accessing credit.”
After 18 months of stealth, Float is finally live, and we spoke with the CEO to get an overview of his progress and what makes him different from similar platforms on the continent.
TC: What problem do you think Float solves?
JG: If you ask any small business, cash flow will likely be the number one issue they face. And that stems from the entire payment cycle, that is, after you’ve provided a service or delivered a product. Businesses that serve other businesses typically have to wait 30 to 90 days for their payments to arrive. It’s like a traditional payment cycle where you have to offer credit sales to your customers to stay competitive; that’s why you send an invoice and the customer will reimburse you within that time.
This creates a lot of problems in terms of constant shortage of cash. Because you wait for your income to arrive, they sometimes fall behind in paying certain expenses like payroll, inventory, utilities. This is what really causes a lot of these cash flow problems, and because of it, businesses cannot grow. For existing businesses these are the problems they face and getting working capital credit is extremely difficult if you are dealing with banks.
TC: Have you had personal experience with this issue given that your past business was in the media?
JG: As you know, I was co-founder of OMG Digital, and as media company, we had to wait months to be paid by our partners. We needed credit this time around and overdrafted with a long-time partner bank where we had made over $ 100,000. But the bank wanted us to put down 100% cash collateral before we could give the overdraft.
I also remember taking money from loan sharks at ridiculous interest rates, sometimes up to 20% per month, just to keep up with the payroll. This prompted me to resolve these issues with Float.
TC: There is a plethora of lenders who provide business loans. How does Float solve the credit problem differently?
JG: So our credit product is quite different in the way we present it to the customer. It’s less complex than a loan; it is more flexible than a commercial overdraft. In addition, there is a difference in the tools we provide. So we don’t just give money; what we have provided is a software solution with built-in credit.
Right now we have built what we call the cash management tool for businesses where they get credit at critical times. For example, if you want to pay a lender and need credit, you can withdraw the credit and make the payment immediately. We provide a line of credit that businesses can use anytime as soon as they integrate with our platform, and it increases and decreases based on transactions made on our platform.
So it’s just on the credit side. We’ve also designed tools to help businesses take control of their cash flow. We give them invoicing, budgeting and expense management tools and a way for them to manage all of their bank accounts because we know that existing businesses usually have more than one bank account. On Float they can see all of their balances and transactions, and we are creating a way for these companies to make payments from their accounts on Float.
You can think of Float as a very well-designed cash management platform. You get credit when you need it to make supplier payments or increase your working capital, which has been critical to our 0% loss rate. Then, two tools that give full visibility into your businesses so you know where your money is going in and out.
TC: Float’s loss rate is 0%? Does this mean that no business has been faulted on your platform?
JG: Yes, we haven’t had a fault so far. We have advanced $ 2.8 million to our pilot clients in Nigeria, and we have not incurred any losses in the past eight months; it’s because of the type of loans we give. We give money to businesses to increase their working capital. So, we basically give you an advance for your future income.
If you look like, in the US Pipe built this for SaaS companies and built for other customer segments, which is basically what we do. So for us the way we solve the cash flow problem is, we sort your future income and your customers pay you through our platform, we make deductions.
You can think of us as Stripe Capital, Square Capital, Pipe or the new multidimensional lending platforms we have now. When you are considering a loan, I would say there are different phases. Loan 1.0 consisted of completing an online application and getting a loan decision. Credit 2.0 and 3.0 is where credit is integrated with online tools that businesses are already using. This is why it has worked so well, as the companies on our platform are not exactly looking for a lifeline, but looking to increase their cash flow and press the gas to grow.
TC: But that loss rate will probably change as soon as you integrate more companies, right?
JG: Yes, that’s for sure that will change. The problem with loans is that with more customers your credit model gets tested. The more customers you have, the more likely you are to have default losses. But as long as you have a solid benchmark and assessment of credit risk, you should always try to keep it as small as possible. It is almost impossible to have a 0% default rate when you start to grow quickly.
TC: What strategy does Float put in place to mitigate losses and reduce risks?
JG: The way our credit product works is that we are constantly connected to your bank; we know who your suppliers are, who your suppliers are and who your customers are. We know how much money is coming in and going out of your business at all times. So as I mentioned, we can quickly adjust your credit limits as soon as we sense a difference in your business. If we notice that your billing activity has decreased and we are not receiving as much money as you were in the previous weeks, we will lower your limit. It’s a very dynamic type of product, and it’s really different from what you see today.
TC: Apart from the loan, how have the other tools been useful for businesses?
JG: With our pilot phase, we were able to extend credit and also process invoicing and supplier payments for our customers worth around $ 5 million.
When you think of corporate payments, sometimes people always think of Paystack and Flutterwave. They are targeting a different segment which is essentially the consumers who pay the companies. For us, we focus on companies that pay other companies. Their method, as we know, is a very long process and this market is 10 times the size that Paystack and Flutterwave serve.
If you look at your large multinational corporations, they have thousands of vendors on their payrolls every month. Globally, billions of dollars flow from company to company, and this is where we want to play. customers and they refund within 30 days.
TC: I’m tempted to call Float a digital bank for small businesses. Would you say there are differences?
JG: Of course there are. Almost any business owner will tell you that business banking is mostly down. Traditional banks generally offer an outdated and disappointing user experience. Businesses are rapidly moving beyond basic banking needs, and for them the options are desperately limited.
African neo-banks aim to compete with traditional banks. Yet in reality, they are now competing with each other for a relatively small share of the market due to failure to address fundamental issues facing businesses. A slightly better user experience and a quick account opening experience is the value proposition that probably resonates well with a new business start-up or an aspiring freelance writer. However, for an already operating retail business owner who is struggling to make timely payments to vendors due to low cash flow, that’s largely insufficient.
This, along with the trust, reconciliation and audit issues associated with transferring accounts, explains why neobanks have not taken off in this market.
Float incurs little to no change fees as we have designed our platform to run on existing business bank accounts and payment processors. The idea is to provide a single platform that provides businesses with the credit they need, a consolidated view of their existing banking and treasury activities, coupled with various payment tools to enable them to speed up their financial operations in order to that they can spend more time actually growing their business.