Matrix Partners India, a venture capital firm that invests in seed-, early- and growth-stage companies, has invested in Five Star Business Credits, a small-business finance company.

This is the first round of institutional funding in Five Star Business Credits, which is a closely-held public limited company. It is a registered non-banking finance company that has been in business for nearly 30 years and has tweaked its business model in the last five-seven years to focus on the micro, small and medium enterprises.

Matrix did not disclose the investment details, but said the amount was significant and that it had picked up a significant minority stake in Five Star Business Credits. The money will be used to expand the branch network and grow the business.

“Five Star has a highly differentiated, secured and sustainable lending model to address the large, under-served MSME financing opportunity,” said Rishi Navani, Managing Director, Matrix India.

“We have built a unique credit assessment model for deserving customers that run small but healthy businesses. All our loans are collateral backed. This round of funding should help us further expand our branch footprint and enhance our funding base for long-term expansion,” said D Lakshmipathy, Managing Director, Five Star Business Credits. The company has served more than 5,000 MSME customers and is present across 30 branches in Tamil Nadu.

For Matrix, Five Star Business Credits is an interesting investment option because it targets a large but unaddressed market. It provides funds to businesses that are not covered by the traditional banking system. Five Star has helped in financial inclusion in a big way, which is what the Government and Reserve Bank appointed committees have been focussing on.

Five Star lends to enterprises such as provision stores, small restaurants, textile stores, bakery outlets, medical stores, and small and medium machine shop operators. These businesses are not covered by the formal banking and financial channels as it is difficult to assess their credit worthiness.

Five Star’s interest rate at 22-24 per cent was higher than what banks would charge, but lower than that charged by microfinance institutions and the non-formal financing channels.

Lakshmipathy said the company has experience in assessing the cash flows of these businesses and worked closely with them. There were no bad debts in the last five years, he said.

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