Small business lender Aye Finance has received Rs 20 crore funding from Accion, a pioneer in financial inclusion, and venture capital firm SAIF Partners.

​​These new investments will help the financial services startup provide India’s micro and small enterprises (MSMEs) with expanded access to financing. India’s MSME sector represents nearly 58 million businesses, creates 150 million jobs, and accounts for 45% of the country’s industrial output.

Despite the importance of MSMEs, the businesses are often too complex for traditional microfinance lenders and too small for traditional banks. This ‘missing middle’ must contend with a Rs 5 lakh crore funding gap which impedes entrepreneurs from launching or expanding businesses. The enormous demand for new capital has created a viable market for innovative lenders like Aye Finance. Through an innovative use of technology, credit assessments, and a new ‘Industry Cluster Enablement’ (ICE) model of lending, Aye Finance helps India’s MSMEs meet working capital and capex requirements as they look to grow their businesses.

“We must find more efficient ways to provide Indian small businesses with the capital they need to grow. If we succeed, we can help entrepreneurs launch, sustain and expand their businesses. Aye Finance’s industry cluster approach is an exciting innovation that can help open up great opportunity for those small businesses unlikely to get bank financing. We are excited to deepen our partnership” said Accion President and CEO Michael Schlein in a statement.

“Aye Finance’s innovative ‘industry insight’ approach has helped the lender find, assess, and evaluate prospective borrowers. Their creative approach has helped India’s micro and small businesses obtain the financing that they need, and has unlocked credit for entrepreneurs who are typically locked out of the financial system,” said Vishal Sood, Managing Director, SAIF partners.

“Aye Finance’s new-age mobile and cloud computing model cuts operational costs and ultimately allows more of the tens of millions of micro enterprises throughout India to find the financing that they need,” said Sanjay Sharma,

Managing Director, Aye Finance. “Our loyal and growing customer base underscores the need for this service, and the continued growth of India’s industrial segment will ensure the long-term demand for responsible, affordable financing.”

Aye Finance is based in North India where the concentration of micro and small businesses constituting the ‘missing middle’ is the highest. Even in southern states, where penetration of lending by the organized sector has traditionally been better, there remains a large unaddressed segment. In time the company plans to grow in other regions.

Despite the fact that their borrowers often have little credit history, Aye Finance assesses ‘thin-file’ customers using an insightful underwriting approach. Its ‘industry cluster’ approach allows Aye Finance to develop thorough expertise in particular micro-industries. This familiarity allows Aye Finance to better understand what a prospective borrower’s financials should be, assess their creditworthiness, and evaluate their reputation, ultimately helping the lender originate loans between Rs 0.5 lakh and up to Rs 25 lakh faster, better, cheaper, and with less risk.The company’s focus on this forgotten customer segment is beginning to see support from a number of financial intermediaries. Aye Finance has already raised debt funds from a diversified group of top tier funding organizations like IFMR, Intellegrow, MAS Financial Services and a number of Banks. An optimal mix of equity and debt will go a long way in sustained scale up of the lending business.

Both Accion and SAIF Partners will assist Aye Finance strengthen its existing operating base by refining its underwriting processes and risk analysis, improving data analytics, assisting with product development, and encouraging broader industry engagement. In its second year of operations, Aye Finance has expanded to 16 cities across northern India and plans to continue expanding in the coming year. The company leverages cloud-based automation to minimize operating costs while keeping robust controls on the field. The low operating costs are expected to make the company to break even in its third year of operations.