Recently, the ICTA, as part of its efforts to support startups, unveiled a credit scoring framework. Developed in partnership with PwC, the framework helps banks identify the creditworthiness of startups that apply for loans. The initiative addresses a fundamental issue that has hindered the growth of Sri Lankan tech startups. Already, it has begun helping local startups. Recently, local fintech startup PayMedia secured an LKR 85 million loan from NDB because the bank adopted this framework.
Why is it so hard for a tech startup to get a bank loan?
If you’re the founder of a tech startup, you’ll know that it’s not easy to get a bank loan. As Founder and CEO of PayMedia, Kanishka Weeramunda explains, “Unlike in other industries, startups in the tech sector today are often selling intangible software products.” Hence, startups find themselves in a challenging position where they lack collateral.
Senior Manager – Startup Ecosystem Development at ICTA, Tamasha Fernando, added, “Many technology companies in Sri Lanka find it difficult to get loans. The strict requirements for physical collateral by banks are the cause of this. That’s why founders end up putting down their personal belongings like their house or vehicle as collateral.”
Of course, it’s not easy for banks to drop this requirement for collateral. They’re responsible for protecting the life savings of their customers. Given that 90% of all startups fail, it’s hard to justify why bankers should take such huge risks. As such, tech startups and banks have been locked in a never-ending battle with no winner.
Even for PayMedia, Kanishka shares, it was a challenging task. Since its founding in 2014, the startup has worked closely with the banking industry. The company was the first to introduce real-time cash deposit machines to Sri Lanka and has developed a range of payments solutions. Over the years, the company has won several awards for these products. It has also launched a subsidiary called DirectPay, which specialises in digital payments and recently crossed the milestone of processing LKR 3 billion payments.
Despite its close relations with the banks, it was a time-consuming process to get funding from them. Kanishka elaborated, saying, “It can take anywhere between four to six months to get a response. After four months, then you’ll hear, ‘We’ll fund 50% of the project.’ But as a startup, you can’t do anything with that because you need the remainder too.”
How the ICTA’s new framework helps startups obtain funding
The growth of the tech industry directly translates into the digital transformation of other sectors. Director of Startup Ecosystem Development at ICTA, Sachindra Samararatne, noted that in developing countries, banks had dedicated departments to offer financing opportunities for startups. Hence, as a nation, Sri Lanka should actively invest in developing the export potential of the technology industry.
The new credit scoring framework helps bridge the gap between Sri Lankan banks and startups. ICTA had developed it working with PwC alongside an industry-led steering committee. The framework evaluates startups based on four key factors. They are as follows:
- The capability of the founders and management team
- The market potential of the startup
- The product/service itself
- The financial health of the startup
By focusing on these four factors, it’s now possible for banks to analyse a startups’ intangible assets when assessing its creditworthiness.
Currently, six banks have started looking at implementing the framework to give loans to startups. Among the first banks to adopt it is NDB bank. Speaking to Arteculate, NDB Kohuwala Branch Manager, Kuraish Sappidin, commented, “This framework is a positive move from the ICTA and PwC for the growth of the banking industry. It offers a great opportunity for startups to work with the banks and grow their business.”
As a startup founder, Kanishka describes the framework as a game-changer. Thanks to it, PayMedia secured an LKR 85 million loan from NDB. He went onto share, “In the past, funding from banks was out of the question for startups. The most viable option was giving up equity to investors. But now a founder doesn’t need to give up equity or provide collateral to obtain funding.”
How founders can get a loan
Currently, the programme is still in its early stages. If a startup is seeking a loan with the new framework, it’ll have to submit an Expression of Interest to the ICTA to get a credit score. Afterwards, it can reach a bank for final approval. To date, 30 companies have submitted Expressions of Interest. Over time, this number will likely rise as more banks begin fully implementing the new framework. Still, it’s not a walk in the park, and founders will need to get a few things right.
Kuraish shared that founders seeking to get a loan should “Have a clear project report, a strong product, and a clear understanding of their market.” A bank would look at this information to understand the current status of the startup and predict the future demand for its product.
Kanishka also emphasised, “It’s not the same as with investors. You can’t just walk into a bank, pitch an idea, and expect to get funded. A startup needs to prove they have a strong and credible track record.” Such companies are known for having experienced founders, responsible roles within management, a scalable product, and high customer retention.
As the Sri Lankan technology industry grows, the credit scoring framework by ICTA and PwC removes a key barrier for the continued growth of startups. Moreover, with PayMedia obtaining the LKR 85 million loan from NDB, the road ahead looks optimistic.