Meet the firm that is brave enough to fund small businesses

Times

4 days ago

With more businesses permanently turning their backs on external finance, and bank lending to small companies well below historical trend levels, who would be brave enough to get into SME lending?
While the government is concerned that demand for finance from small and medium-sized enterprises is so weak that it is damaging UK productivity, Christoph Rieche and James Dear believe they can build a successful publicly listed business out of backing entrepreneurs.
Their company, Iwoca, has lent close to £4 billion in unsecured loans to about 100,000 businesses since it was incorporated in 2011. In 2024 alone, it lent more than £952 million.
'Last year, 120,000 new businesses signed up to Iwoca. There is certainly demand out there,' Rieche, 45, Iwoca's German chief executive, said.
The original idea was to use technology to quickly get very modest loans to small online traders selling on sites such as eBay. While its focus on automation and efficiency remains — on average, it takes 20 seconds to get a decision — these days it will lend up to £1 million in a single transaction. Iwoca has discovered that mid-sized businesses feel their finance needs aren't being met by mainstream lenders either.
There are two main reasons why the picture painted by lending start-ups such as Iwoca is so different from that portrayed by the core bank lending market, Rieche says: appetite and ability.
'It's really hard to improve a system that has been built over decades and has flaws everywhere,' he said of traditional lenders' approach. 'The best they could do would be to bin what they have and start entirely from scratch.'
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However, that would require a motivation that Rieche suspects is absent. 'Banks have been retrenching from SME lending and we have seen non-bank lenders and challenger banks taking up the slack,' he said.
'There's more competition because of the likes of us [but] the overall stock of lending has probably not changed much. I'm confident companies like us will continue to grow and the stock of loans will ultimately grow. There will be an inflection point.'
Rieche co-founded the company with Dear, a former Deutsche banker, after leaving a job at Goldman Sachs. The pair funded the start-up with funds from friends and family.
Iwoca has since been backed with a relatively modest £70 million in equity but has debt commitments of more than £1 billion, a figure which continues to grow alongside its lending. Barclays and Citi provide the majority of its wholesale finance.
Rieche has been leading the business for more than a decade, a lengthy innings for a founding chief executive of a venture capital funded start-up, but he says there's still a long way to go. Iwoca's aim is to reach the milestone of financing a million small businesses.
'In doing this a million times over, you really do have a very significant impact on the economy. That is still really motivating. I like the idea that we're having an impact on individual business owners, giving them the funding they need to do what they need to do.'
Not that it's been plain sailing. The pandemic proved 'horrific' for Iwoca, Rieche said.
Emergency loans for businesses from the government meant its core market all but disappeared. 'When the first lockdown hit, all of our lines were busy from customers saying they can't pay,' he recalled. 'The worst moments are when you think you are going out of business.'
Iwoca emerged from the Covid-19 crisis as loss-making and with a depleted customer base. 'We had to start from a very low base again. We lost a significant amount of money every month by investing in customer acquisition but at the same time the macro outlook was horrible. It felt uncomfortable to lose a lot of money by growing so fast by lending in a world that was so uncertain.'
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He says the company put faith in its largely automated lending models even when the data appeared to conflict with the 'noise of the world around us'. The difficulties gave him more empathy with his customers.
'You are not quite sure you will be there in six to 12 months, that is when you need access to funding. That is true for so many businesses. I feel quite good we can provide funding when our customers really need it.'
Accounts for 2024 show Iwoca's recovery, with revenues up from £142.6 million in 2023 to £234.2 million. Pre-tax profits rose from £21.8 million to £59.1 million.
Iwoca funded a business every seven minutes in the first half of this year, but it has only 50 human underwriters. 'A large chunk of our lending is fully automated,' Rieche said.
While he joked that 'when you do a million pound loan, it's OK to ask for a little bit more information', the 'Holy Grail is to have as little human bias as possible in the process so that there's as little difference as possible from one underwriter to another and, increasingly, to automate the bits that they're still doing in a manual way'.
Rieche hopes to float the business once markets look more attractive. 'We are definitely big enough to float, we are profitable, we would be attractive to the market but I think we need to see that the market becomes more welcoming again to new companies,' he said.
Rieche said he was closely watching the impact of recent reforms intended to make London more attractive to entrepreneurial companies. 'We are headquartered in London, our home market is the UK, so our first choice would be to list [here]. If the time is right, we'll seriously consider it. For every entrepreneur, a public listing is still a great achievement.'
The company intends to reinvest profits to investigate the possible expansion of its services, including into insurance and legal services for small companies.
'We now have more than 30,000 businesses coming to us every month to apply for finance. We'll be able to show them additional problems we can solve for them, other things in the shop window.'
Despite retaining youthful looks, Rieche admits the role can take its toll. 'It's not every day I'm jumping out of bed thinking, I am so much looking forward to work today! Jeff Bezos has said, if it's OK 50 per cent of the time, that is really good. That is very true.
'It's never been stale, every year has been different. I like that I can have an impact on the economy if we do this at scale, and I like being an innovator — that's what's been driving me all these years.'
Janet Theodore's soft drinks business has its origins in the homemade refreshments her late mother, Louise, made when she was a child.
'We are from a big Caribbean family and our parents couldn't afford juice cartons so my mum used to make her own drinks and flavourings. We are carrying on from what mum started.'
JBN Beverages, which produces sparkling fruit drinks and alcohol-free wine alternatives, will soon have its products available in Tesco stores after Theodore impressed an initially sceptical supermarket buyer.
'I could see the look on her face, 'not another beverage, the market is saturated'. Her face told me the story,' Theodore, 62, said. 'The proof is in the pudding so I get people to try the drink before talking. She took the first sip and went, 'mmm'. That's usually what we get! She was hooked. That's how we get through to buyers.'
Getting through to lenders was less straightforward for JBN, which is based in Dunstable, Bedfordshire, when Theodore was seeking funding for testing and ingredients. The company, named after Theodore and her two daughters, Bethany and Nicola, has been in the works for several years but was only incorporated as JBN in February and most funders wouldn't back a start-up.
'It's been a journey and a half and the toughest thing has been securing finance. We tried so many people, high street banks and financial institutions. They would say they could do it, then say they couldn't. Everyone was saying no.'
NatWest, HSBC and several smaller lenders were among those who turned JBN away before it eventually managed to borrow £1,000 from Iwoca, which helped to pave the way for the Tesco deal. Theodore says she will approach the lender again as JBN seeks to expand into hospitality and reach other retailers.
'The funds were in the day after we applied. We would definitely use them again for working capital, we will be reaching out.'