An engineering graduate from Coimbatore and an MBA from IIM-Bangalore, Madhu Sudhan had been in financial services. He had been an investment banker and was with a leading television and online media group looking after its investments, both in Mumbai, before joining a private equity fund in Delhi. It was then that Madhu teamed up with a friend to start a venture on their own, which provided a mobile survey solution, in early 2013. Madhu says they decided to wind down that venture in 2015.

“The team stuck together. I was clear I wanted to explore ideas in the financial services space,” he says. In his earlier stints in investing, he had realised that, while equity capital was not so difficult to raise, small businesses faced a gigantic task in getting debt. They then decided to focus on making available debt for small businesses. That resulted in them forming Loanzen Technologies, which was a platform where they originated debt from other lenders for small businesses.

According to him, they wanted to focus on segments where technology and data would help address the problem of debt. “Given that an earlier venture hadn’t really scaled, we were fairly clear we will understand what works in each segment before we start off,” says Madhu.

The team also relocated to Bengaluru from Delhi, because of the city’s strength in data science and technology. They did a lot of pilots and one of the pilots that worked well was in the vehicle financing space.

It was extremely important, says Madhu, for them to be part of a large market, one where the path to scaling up is clear. They also wanted to stick to segments where they could standardise data sets, where they could automate large parts of the underwriting process.

Focus on logistics sector

“Vehicles, in a lot of our pilots, seemed to be one of the key segments that worked. That coupled with the fact that there is a significant growth in the market now, there are a lot of things happening because of GST, there is a lot of intra-city logistics, it is a growing market...lot of characteristics of the product we like. It is fairly standardised. You can predict the expected cash flow from a vehicle, how much that business will be able to leverage,” says Madhu.

Loanzen decided to focus on the logistics sector and decided to apply for a non-banking finance licence, which they got in February. The NBFC, Loanzen Finance Pvt Ltd, is a subsidiary of Loanzen Technologies and now originates loans on its book.

“We focus on small logistics and small businesses, which get vehicles for their captive use or for logistics purposes. We also look at companies in the manufacturing space and in trading. Our target borrower is one running a small business, either trading or a small manufacturing operation or a small transport business. They are either attached to larger logistics players for e-commerce deliveries or transporting vegetables or pharmaceuticals,” says Madhu. They also decided to focus on the used vehicle segment as there were more companies financing new vehicle purchases. While many of the large lenders work with fleet owners, Loanzen decided to focus on the lower end of the chain. Many of their customers are new to credit and were borrowing from local money lenders.

Loanzen Finance lends ₹1-10 lakh, typically for 2-5 years with interest of about 18 per cent. It will not finance vehicles that are more than eight years old. The vehicles are small commercial vehicles or light commercial vehicles. These vehicles are low maintenance, good from a yield perspective and an operator, in normal situations, can earn ₹30,000-40,000 a month, which will be good enough to pay monthly instalments on the loan.

According to Madhu, Loanzen hopes to close 2018-19 with a loan book of ₹25 crore. It is present in Bengaluru and wants to expand operations to Karnataka and Tamil Nadu by this fiscal year-end. The company will start looking to raise ₹30-35 crore in equity in October-December period.