Iwoca’s CEO is predicting profitability in 2023 as credit losses remain “below our expectations”

It’s been a challenging four years for SME lender Iwoca, after turning its first annual profit in 2019 the firm then fell back into annual losses during Covid.

Now, as it has lent to over 90,000 business customers in the UK and Germany, CEO and co-founder Christoph Rieche is forecasting the company will be back in the black by year-end 2023, having spent 12 months belt-tightening and eventually turning a profit in the final quarter of last year.

"It's been a great 2022 for us, and towards the latter part of the year, our higher revenue growth and credit losses being in line or slightly below our expectations led us to profitability,” Rieche told AltFi.

“Overall we do expect a profitable 2023.”

Iwoca’s Revenue Driver

The driver of Iwoca’s recent growth has been the success of its Flexi-loan product, which during the Covid period Rieche’s team worked hard to make even more flexible, including by doubling the maximum size of its loans to £500,000.

“That means we give [businesses] more choice when it comes to repayment terms, we focus on giving them the right amount they need, and last year we added the ability to make repayments as part of their revenues.”

Rieche likens Flexi-loan to a flight booking, where customers can pick and pay for the best options that suit their needs.

Despite the greater flexibility, Iwoca is yet to see a significant increase in its defaults, which Rieche says is a result of high street banks turning away creditworthy SMEs.

“Generally we have seen more customers coming to us who would have a lower expected credit loss rate than our average loss rate,” he said.

“I think it's a sign that banks have been retrenching, which means more customers come to us that they would previously have funded.”

Despite the current low rates, Rieche is clear that he expects those loss rates to increase the longer the UK remains in a recessionary environment.

Indeed, according to the data in Iwoca’s upcoming Q4 2022 quarterly survey of SME finance brokers, the volume of lending being used as working capital is increasing, as businesses contend with growing cashflow challenges.

Only 36 per cent of lending originated by Iwoca’s survey panel of brokers was for business growth in Q4 2022, down from 41 per cent the previous quarter, and compared to the 41 per cent that was used as working capital and 12 per cent that was used for bridging cash flow caps.

Expanded Funding Lines

As well as profitability, Iwoca also today revealed that its funding line from alternative asset investment manager Pollen Street Capital has been increased by £50m to £170m.

“This new facility builds on our existing relationship with Iwoca which began in 2016 and epitomises our commitment to investments that drive positive impact, in this case, the ability to support small businesses through a high-quality lending partner,” said Michael Katramados, a partner at Pollen Street Capital.

Rieche confirmed that growing demand for finance would continue to translate into Iwoca’s growing need for debt financing from its partners, with more raising on the cards for 2023.

“We'll be raising more financing this year, which we'll be announcing, because as we grow quickly we also have to grow our refinancing facilities,” he said.

Still, despite the lender’s recent success, Rieche remains level-headed about the challenge Iwoca faces ahead as the UK and German economies remain precarious.

“The sentiment of the thousands of businesses we're funding isn't too different to the sentiment that you're reading about in the press,” the CEO explained.

“We're still in that recessionary environment, it's just that we haven't really seen that coming through [as losses] these last few months.... but I think at some point it will come through.”

UPDATE 01-02-2023 - An earlier version of this article incorrectly stated that Iwoca has 3m business customers, when the actual number is over 90,000.