New Credit Evaluation Framework: Investing in the future


Lending credit for tech scale-ups without equity swaps or collateral

Obtaining credit for further expansion of a business at some point is inevitable. When lending money to such businesses, lenders inherently want to make sure borrowers are capable of paying them back without defaulting. This includes assessing the creditworthiness of the borrower and requiring them to submit collateral against the credit. But not every company’s creditworthiness can be assessed utilising the same framework; and, most certainly, not every company can provide or prove assets even though they have successfully been in business for some time now. This particular issue makes borrowing way harder for tech companies, as their assets are talent-based, unlike other businesses with tangible assets.  

Left: PayMedia Founder Kanishka Weeramunda, Right: ICTA Startup Ecosystem Development Senior Manager Tamasha Fernando

Now, to make this easier, a new Credit Evaluation Framework was introduced for tech companies in Sri Lanka, with the collaboration of both the Information and Communication Technology Agency (ICTA) and PwC Sri Lanka, last Wednesday (9). 

Curious to know more about this framework and how it has been worked out, we spoke to PayMedia, the first company to be evaluated and benefitted. Speaking to The Morning Business, PayMedia Founder Kanishka Weeramunda stated: “It was an easy three-step process, where we were to submit the past financials and future projections with necessary track-record documents to ICTA and PwC, following which we were invited for a pitch at the bank.”  

ICTA Startup Ecosystem Development Senior Manager Tamasha Fernando disclosed that this new framework aims to provide alternative evaluation options for traditional lending companies such as banks and financial institutes, who look forward to supporting the scaling up of tech companies.

Weeramunda said that the credit evaluation system has been solely focused on tech companies because there was no practical evaluation mechanism in existence for banks or any other financial institution when tech companies needed to upscale the business. 

Also, the existing evaluation mechanism that banks were dependent on did not, in actual fact, highlight the market potential that a particular technological company has.

Elaborating on the background which led to creating the aforementioned framework, Weeramunda said: “The tech companies offer products and services where there is no tangible asset,” demonstrating that when it comes to funding, institutions such as banks want to evaluate feasibility by calculating the asset value depreciation, an accounting method of allocating the cost of an asset, which is typically a tangible one, over its life expectancy. However, it is difficult to measure the intangible assets that tech companies own, as in terms of tech companies their asset value “is all about knowledge”.

“There was the challenge of evaluating these kinds of companies (intangible asset owning companies) which provide intangible products and services,” he said. “That was the battle we had for the longest time.”

He explained how the banks in Sri Lanka needed to develop an understanding of the evaluation of intangible assets, and therefore, a framework of such nature was vital. Weeramunda demystified how this launched framework functions in bridging the communication gap between banks and tech companies.

“It basically had five areas,” said Weeramunda. Firstly, the banks put light on the founders’ capability, management capability, the market growth, the product, and finance.

In terms of founder capability, the history of the founder is analysed. The type of background that the founder has had when initiating the tech company, their education with regard to the subject matter, and their entrepreneurial expertise are the areas that the bank is vigilant about prior to financial aid.   

When it comes to management capability, he said from his experience so far, the banks conduct research on the management team, the risk assessment mechanism of the company, the domain expertise in developing the team, and intellectual property handling, in terms of whether it has been decentralised among a few individuals or maintained by a single individual. 

Weeramunda stated: “I think it is a fair way to see the business continuity with the team, and the important fact is that their (banks’) focus is on how long the teams (management) will stay together,” implying that the strength of the establishment among each individual also affects the business continuity.

Focusing on the market growth, he briefed: “We were evaluated on our local market potential, international market potential, and the market type,” elaborating that the bank followed the TAM-SAM-SOM theory. 

He explained that these acronyms are respectively, Total Available Market (TAM), Service Accessible Market (SAM), and the Service Obtainable Market (SOM), and mainly represent the subsectors of a market.

Accordingly, TAM implies the total market demand for a product or a service, while SAM shows the geographical reach targeted in the total product and services demand market; simply TAM and SOM is the portion of products and services that have been captured in the targeted geographical reach, which is the portion of SAM.  

“They (financial institutions) use this (TAM,SAM,SOM theory) to see what is the  bigger picture on the market (the tech company) can serve,” indicating the target market of such a company and the degree of realistic approach into the market. Thus, evaluation assesses the duration of a customer’s enthusiasm in obtaining a particular service.

The fourth focal factor when it comes to evaluation is the product. In this area, Weeramunda said: “We were questioned about the innovation; whether we are a disruptive innovation, or mindful, sustainable innovation,” in order to figure out the ultimate result of the innovation.

The financial institutions also concentrate on the company’s finances. The standard practice was maintained in evaluating this, he said, explaining that the bank looked at the investor viability, as in the perspective of the investor, and whether they would be interested in investing. 

Moreover, the company’s stability in the market and its social conduct is also researched by the banks.  

In providing evidence of the company’s innovation, he emphasised the need of having a track record of their own despite the phase of the tech company. “You need to build your track record as a startup or scale-up,” he said. The company needs to showcase the products or the service that currently exist in the market and how the funding directs the company to thrive from the existing circumstances.

Therefore, every company does not become eligible to be funded by a bank following the evaluation framework, according to Weeramunda. It is because the framework is not designed for a startup going through the early stage, but the scaling stage, when it needs additional money to expand.

Furthermore, when banks support in funding such companies, it creates a market opportunity for the companies. At the same time, the funding creates a pathway for the flow of Foreign Direct Investments (FDIs) into the country, as foreign investors come forward in funding these tech companies under the assurance that domestic funding institutions have already evaluated the tech companies prior to the funding. Thus, the evaluation framework provides credibility to foreign investors, he pinpointed. 

PayMedia, playing a prominent role throughout the credit evaluation framework, is a rapidly evolving financial technology (fintech) company in Sri Lanka. The fintech company was granted a loan from NDB Bank without having to swap equity or offering collateral to fund their business, which is a total advantage for a tech company. 

With regard to the funding by the banks, we were able to contact NDB Kohuwela Branch Manager Kuraish Sappidin, who explained the bank’s perspective.

At the stage of initiating this framework, ICTA and PwC conducted the credit evaluation. In order to provide financial solutions, ICTA and PwC provided the few banks, including NDB, with a few tech companies who were willing to scale up and go to the next step in expansion.

“I won’t say there is no risk, there is a risk,” said Sappidin, emphasising that in spite of the tech companies looking forward to their development, the banks do, in fact, do go through risk, as this is a step beyond the traditional banking framework. 

Further, when asked about other branches of the bank adopting the aforesaid framework, the NDB Branch Manager responded in an optimistic tone. He said: “We know the eligibility criteria we are looking for. Based on that, all the branches under NDB have confirmed to be on board,” implying that the NDB network understands the purpose and the criteria of the framework, and anticipate implementing the evaluation strategy.   

He further said: “This is taking the project to the next level,” suggesting that NDB also is the first bank in Sri Lanka to undertake this evaluating mechanism, opening a pathway in contributing to the development of the technology industry in the country.

Additionally, apart from NDB, credit evaluation officers from several banks such as Seylan Bank, DFCC Bank, and Union Bank have already expressed their willingness in considering the new framework when assessing technology companies prior to financing.

At the launch of the framework, ICTA Chief Digital Economy Officer Anura de Alwis said: “The technology industry is core to the country’s economic growth, with the highest potential for employment opportunities. But most tech companies are faced with difficulties in obtaining loans due to a lack of physical collateral. Moreover, the pandemic has forced many challenges on tech companies, derailing growth to some extent. In this background, the new framework launched with PwC will play a crucial role in boosting the tech industry.”

In conclusion, PayMedia Founder Weeramunda said that banks need to further change their mindset of evaluating tech companies in order to overcome the shortcomings of traditional frameworks.


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