Case Study: Future Finance
The following commentary is based on this Bloomberg article on Future Finance, a start-up that lends money online (up to £40k per applicant) to students in the UK. The minimum amount of loan is £2.5k and the company has disbursed £25 million so far.
Let’s make some quick calculations – assuming all successful applicants take on the minimum amount of loan (£2,500), that means there is a maximum of 10 thousand applicants over 2 years (they started in 2014). Given that the company has attracted more than 37k applications, the approval rate for applications is less than 27% (over the 2-year period).
So how could it have attracted £119 million in funding?
Here are 3 possible reasons:
- A better product
- Having an interest rate that varies according to the tenor and amount of the loan provides the borrower more flexibility compared to “off the shelf” loan rates offered by banks.
- The user interface is intuitive (especially the beautiful sliding bar) compared to the text-heavy loan documentation required by banks.
- Growth potential
- If £25 million is loaned to less than 1.5% of the student population in the UK, there’s potential for more in the UK to come on-board the platform.
- Additionally, expansion plans to Germany could only be seen as the start of growing market share in other parts of Europe.
- Low risk
- The lending trade has a special revenue model because the amount dispensed (£25 million) is also part of the expected return (it’s a contracted legal obligation of the borrower to return the principal as well as the interest) – so the extra £119 million is not just Cash Flow from Financing activities (CFF) but is also part of the investors’ expected return. On top of that, the revenue generation is not just limited to the Principal and Interest payments – with proper cash flow management, each dollar received as interest (from loans given out earlier or through trades with factoring companies) could be pumped back into the “Principal” pool to be reinvested to get interest on it.
- It could also be argued that the credit worthiness of educated young people would only improve as time passes (if they’re responsible with their education and self-improvement needs, they’re more likely to be responsible with money). Taking a step further into the future – if the customer experience is satisfactory, these borrowers will be open to taking up loans with Future Finance for homes and other large expenditures down the line. This value of lifetime loyalty augments point 2’s “growth potential”.
Targeting the young is nothing new – banks do it too in attempting to secure the lifetime loyalty of each generation.