Dark Light

FrontEdge raises $10M in debt, equity from TLG, Flexport to facilitate trade for African exporters Leave a comment


In the dynamic landscape of African international trade, a prevalent challenge looms large: A mere 30% of trade volumes find financial intermediaries in banks. This glaring gap in financing disproportionately impacts small and medium-sized enterprises (SMEs), as their larger counterparts absorb the lion’s share of the limited available capital. 

The opportunity to reshape African trade becomes apparent when considering the annual value of international trade volumes — a staggering $1.2 trillion. More importantly, this untapped market underscores the need for startups that can take advantage. One of them is FrontEdge, a Lagos-based fintech that has recently raised $10 million in debt and equity seed round (the former contributing over 70%) to enable the growth of African cross-border trade.

Founded in 2021 by Moni Alli, FrontEdge provides SME exporters and importers with the working capital and software tools needed to facilitate their cross-border and international transactions. Over the past decade, the former McKinsey consultant had ideated solutions to close the SME financing gap in Africa, drawing on a career focused on digital transformations for tier-one banks, particularly in Nigeria, South Africa and Morocco. FrontEdge is the culmination of his experience, the founder, who also worked in private equity at Development Partners International (DPI), tells TechCrunch in an interview.

“I spent a lot of time advising banks around SME financing, but I think the result I saw was that balance sheet was largely allocated towards large corporates. The financing process in banks is outdated; you have collateral-based lending, which means underwriting an SME can be deemed unprofitable,” said Alli, who founded the company after completing his MBA at Harvard Business School.

“So it makes sense to digitize these processes and tailor it to SMEs, and that’s the push I tried to advise around before that led to FrontEdge. Our focus was on African SME exporters specifically. In that space of cross-border trade, we saw a huge gap in terms of financing and an opportunity to underwrite transactions across countries essentially.”

The challenge FrontEdge identified can be seen in the pre-funding model of, for instance, agri-commodity traders. These traders advance funds to smallholder farmers, overseeing the entire process from warehousing to transportation, which spans 60 days. Following this, there’s an additional transit period of 40 to 60 days, depending on jurisdiction, before payment is realized upon goods reaching their destination. This results in a significant cash tie-up over a 120 to 180-day cycle for exporters. 

Unlike banks, FrontEdge provides upfront capital to these exporters based on transaction-based underwriting without a request for collateral. However, Alli said its intervention timing varies based on the risk it’s willing to assume. According to him, the startup typically engages when goods are on an actual vessel or, at times, at the warehouse, with average payment terms set between 60-90 days, allowing the fintech to fund the working capital gap, thereby accelerating receivables and allowing exporters to engage in more transactions.

While FrontEdge initially developed a lending-first platform, it has evolved to become more robust. It’s plugged into different databases to provide insight into the cross-border trading dynamics between buyers and sellers and underwrite offshore credits of buyers. After completing several trades last year, the startup observed that these entities were receiving dollar flows and recognizing an opportunity to address challenges related to capital controls and high fees within the banking system. As a result, the fintech extended support by facilitating the setup of overseas offshore accounts, allowing for converting dollar proceeds into naira, the local currency of many of these exporters. 

Subsequently, FrontEdge, which lists the likes of JP Morgan and Providus Bank as partners on its website, acts as a vertical bank (consisting of financing, cross-border payments and offshore accounts) tailored to the needs of African traders. Meanwhile, it provides software tools, including logistics management, cargo insurance and document management, to exporters to complement its financial offerings. The company’s adjacent competitors in Africa include freight forwarders such as Jetstream and Send; those with similar business models, such as Mundi and Marco Financial, serve outside markets like Latin America. 

“It’s a volume game, and we’re trying to essentially do as many trades as you can, given how tight margins are. And so what you see in Europe and other jurisdictions is like these traders are given this financial support, which means that they can give longer payment terms to their buyers offshore and be more competitive,” said the chief executive.

“And so we equip the African exporter with the funding and tools needed to compete with the South American, European or U.S. exporter. For these large buyers, all that matters is the quality of goods and price. And so we can give them the financing where they can give the right terms and then have a level playing field with many of these buyers globally.”

FrontEdge claims that its customers, SME exporters — grown 20% month-on-month since its launch — have been able to triple their sales on the platform. The company’s revenue comes from a spread of the transactions it finances. Alli doesn’t disclose FrontEdge’s revenue growth, reiterating that the startup emphasizes avoiding losses and demonstrating successful repayments. So far, FrontEdge claims to record a zero default rate after performing over 50 contracts, each encompassing multiple trades and invoices. 

Looking ahead, FrontEdge plans to use its capital provided by lead investor TLG Capital alongside other backers, including digital freight forwarder Flexport, to hire more talent, scale its financing product across Nigeria, Ghana, Ivory Coast and Kenya, and launch additional products as it aims to diversify its revenue streams beyond financing. “TLG is proud to support FrontEdge in its mission to help African SMEs prosper, serving as a crucial conduit to provide access to capital for Africa exporters and financial empowerment. FrontEdge is strategically placed to tackle an important problem that must be solved for African traders to effectively engage in global trade, and we believe that the leadership will execute on the vision,” said Johnnie Puxley, an investment professional at TLG Capital.


Source link

Leave a Reply

Your email address will not be published. Required fields are marked *