At the end of last summer, it seemed that nothing could save Smeo, the online factoring platform for small and medium businesses. And it seems that it will share the fate of other Polish fintech companies that started well, found an investor, and then, for various reasons, could not or did not want to add funds to the always thirsty business. This was the case with Vandla, also in the factoring business, which was acquired by Pragma.
Additionally, 2023 has been a difficult time for fintech companies around the world, with lower valuations and significantly lower investments. In the first half of the year, Smeo secured a promised €1 million capital injection from each of its existing investors. However, due to the increasingly difficult situation of the company and the resulting deterioration of the risk assessment, no funds were received. And Smeo needed them like oxygen.
35 million PLN of private loans
Smeo had an efficient IT system and an interesting business model based on a completely remote method of factoring settlements. After a weaker start to 2023, demand for factoring services accelerated significantly in the second quarter. However, capital was needed. Smeo had a specific financing model – it borrowed money from individuals. Rich, because he had loans amounting to several million zlotys. A total of PLN 35 million was raised. With interest rates skyrocketing, debt servicing costs are beginning to strangle the fintech factoring industry.
The lack of promised recapitalization had double negative consequences for Simio. The board had already agreed with a British fund, which was willing to enter the company once funds were made available by existing investors. Non-payment terminated the contract.
Last summer, the board of directors went around the world looking for a new investor for Smeo: from Germany via Romania, Denmark, Great Britain and the USA. In total, 14 meetings were held. without effect. The company was forced to seek protection from creditors. On August 31, she was supposed to file for bankruptcy in court. A few days ago, Mariusz Korczak, President of Smeo, was in Poznań for business talks and received a call from one of Everest Finanse's partners, brand owner Bocian Pożyczki. On August 28, he was already in Srem for the meeting. After conducting brief due diligence, Everest Finanse announced it was involved. On September 15, the contract was ready. Everest Finanse awarded Smeo 5 million PLN to initiate proceedings in lieu of arrangement (PZU). He promised another injection after this process was completed.
How to convert debt into equity
Under the PZU, the company gets three months to reach an agreement with creditors, find an investor and present a plan to overcome the problems. Smeo was able to tick the last condition because the restructuring plan was ready. The real challenge was the first point. The company's creditors included 90 lenders to whom Smeo owed PLN 35 million.
It should be remembered that that time was a time of tumultuous struggle between Janus Balikot's lenders. The market lost confidence in projects financed with private debt. In addition, Simio had no direct contact with creditors, because loan financing was organized by an intermediary. When payment problems arose, he washed his hands of them. However, Smeo managed.
– We have converted PLN 31.5 million of debt into equity – says Mariusz Korzak, President of Smeo.
Everest Finanse, as promised, added another PLN 5 million. In total, Smeo received a capital injection of PLN 41.5 million.
– This is the largest investment in the financial technology sector in Europe – confirms Mariusz Korzak.
Why do loans need to be factored?
After the deal, Everest Finanse has a stake of just over 50%. The shares in the company are Precapital 10.14%, Finch 7.90%, and the rest are owned by former lenders. The debt-to-equity agreement provides for the purchase of Everest shares within 2-3 years. The lead investor also assumes the scenario of Smeo going public, which will give shareholders the opportunity to exit the investment. It is worth noting that more than 10 years ago, Everest Finanse also thought about the stock exchange, but due to the unpredictability of business in the changing regulatory environment, it abandoned these plans.
658 million Polish zlotys
Everest Finanse Group, one of the largest groups in the lending industry, owns such assets. Its net profit in 2022 amounted to PLN 9.8 million. The previous year the figure was much higher – PLN 28.8 million.
Why did conservative Everest Finance, which rejected many investment offers, choose Smeo?
– The company had been a startup for a long time and had the problems of all startups – the scale of operations was too small to cover fixed costs. Due to lack of capital, it incurred high financing costs. However, it has a low level of risk in its portfolio, it has a good IT system and an interesting business model, and after debt conversion and recapitalization, it is healthy – says Zbyszko Pawlak, President of Everest Finanse.
Smeo is a way for the investor from Śrem to diversify the business based on consumer loans from Bociana. The retail market is becoming more difficult and more strictly regulated. Zbyszko Pawlak believes that 2024 will be a real testing time for the entire industry, which will begin to fully feel the effects of the so-called anti-usury law issued at the end of 2022. The market for the current loan product will begin to shrink. Smeo's entry is a step into the growing factoring market and an opportunity for synergies. Everest can offer a terrestrial network, extensive call center and Smeo's expertise in online financial businesses. Over time, loan products for small businesses may also emerge. The market potential is great because there are more than a million small business owners alone.
Paul Kacprzak
Member of the Board of Directors of BNP Paribas Faktoring
A few years ago, when I was still at Raiffeisen Bank, I was one of the first to open a microtransaction facility in the market, which I later closed. Factoring business for small enterprises looks very attractive as a model. The margins are much higher than in the case of loans, and the market potential seems to be very large. The problem is that it is very difficult to build a “mass”.
Currently, in my factoring company, the average relationship duration with clients is 2-3 years. In the case of small business owners, it often ends after the second invoice. My thesis is that factoring is too difficult, too complex a product for a small business whose owner is both president, CFO, and lawyer. An additional element that affects the concept of factoring is the involvement of a third party, i.e. the contractor. There is often concern about the impact of invoice selling on relationships.
From an operational point of view, the classical agent has an advantage over fintech in that it essentially contacts the recipient of the good only once – at the beginning. Then everything happens automatically. FinTech must constantly maintain relationships with the customer and the recipient who issues individual invoices. The entry threshold is lower than in classical factoring, but then there is the problem of covering fixed costs. For a business to be profitable, you must have between PLN 50 and 100 million in current assets at all times.
