Payday lender Beforepay is pushing for an IPO before the end of the year

But the challenge for Beforepay, which operates in arguably the riskiest area of ​​consumer credit, is getting its money back. So far, it has been unable to do so because its write-offs have exceeded the interest it charges customers.

In fiscal 2021, write-offs and provisions totaled $5 million against $4.5 million in revenue, while the prior year when it started operations, the $48,000 in write-offs totaled $4.5 million. surpassed $44,000 in revenue.

But as Beforepay prepares to sign up, it says it has managed to bring its high level of bad debts under control. Losses went from a whopping 9.5% to around 3%.

It’s time to list

The reason for the improvement, Beforepay explained, was a change in its lending policies. By no longer extending funds to customers dependent on government benefits such as Centrelink, their loan portfolio is performing much better.

This has led to an improvement in its net margins on transactions (loan revenue less funding costs, write-offs and platform expenses) from minus 6.5% to minus 0.6% over the past few years. quarters.

Now that there is a moderation in loan losses, the company believes it is time to list, even though the time is almost up for the year. The listing aims to raise approximately $35 million, which would give the company an enterprise value of $110 million.

(Beforepay said it was unable to answer several questions before the prospectus was officially filed with the regulator on Monday.)

“Virtuous” alternative to credit cards

While payday loans, or the preferred term “Pay On Demand,” are notoriously risky, Beforepay says the market opportunity is great. More than 5 million Australians, or 56% of the working population, have no savings and are facing financial hardship.

He says these financially vulnerable Australians have been let down by banks, who are reluctant to grant overdrafts and want the convenience and ease of use of the product. Like Afterpay, it presented itself as a virtuous and more accessible alternative to high-interest credit cards.

Naturally, not everyone agrees that this is a virtuous addition to the lending scene, and consumer groups have raised concerns.

The company gains most of the customers through digital marketing. But looking ahead to the listing, Beforepay spent $2.7 million on a free-to-air radio and TV marketing campaign.

This included an ad featuring a woman who takes advice from her future self to get a salary advance to buy a lobster on her blind date (and another in which the date does the same).

“What I find dark is that they almost admit they’re targeting losers,” Todd Sampson said on ABC. Grun. Do whatever you want with it.

Former Westpac CEO Brian Hartzer chairs IPO hope Beforepay. Jessica Hromas

But Beforepay is succeeding in luring users to its unregulated payday loan product, even as others have doubts about the ethics of its model.

Chairman and former Westpac chief Brian Hartzer touted Beforepay not as a quasi-payday lender, but as a better way for consumers to manage their personal finances and gain access to “flexible, transparent” credit and “on demand”.

But one risk, which Beforepay has acknowledged in its filings, is that it could only be a matter of time before regulators decide to close the short-term loan exemption that allows the company to avoid comply with national credit law.

He notes that the Australian Securities and Investments Commission ranks among its highest strategic priorities to review credit models that fall outside the credit law and are therefore not required to carry out checks.

Beforepay can claim a certain morality in that it lends money at more favorable implied rates than some of its competitors.

“Risk of undervaluation”

For example, Nimble and Money Plus charge a 4% monthly fee on top of a 20% setup fee, according to a report in Beforepay’s offering documents.

According to some credit experts, this could explain its extraordinary growth rate to date.

But it could also be a sign that Beforepay underestimates the risk. In this case, skeptics say it is simply a transfer of capital from speculative investors obsessed with income growth to destitute Australians in financial difficulty.

Tarek Ayoub, co-founder of Beforepay.

Believers, however, are betting that as Beforepay lends more, it will get better at determining which customers should be avoided. The decision to phase out clients from government benefits is one example.

If Beforepay can meet or beat a loss rate of around 3%, it will achieve the positive unit economics shown in its slideshow.

The average loan amount of $229 charges 5% to earn $11.45. A loss rate of 3% reduced to $6.87. After platform and funding costs, it clears $1.35 at this level of arrears.

Thus, a moderate loss rate is crucial not only for the prosperity of Beforepay, but also for its viability. In fact, the terms of its loan facility with its lender Longreach mean that it must keep these arrears below 7.5% to comply with covenants (i.e. in addition to ensuring that less than 10% of its customer base derive less than half of their revenue from Centrelink payments).

Another challenge is the capital intensity of Beforepay. A lender that loses more than it charges before financing, operating and marketing costs will always be hungry for capital.

This has certainly been the case for Beforepay, which has already issued convertible bonds three times this year. Who holds these notes is a matter of speculation, with suggestions including stockbrokers involved in the sale. (The company could not answer questions before the prospectus was filed.)

The latest convertible issue in September raised $10.7 million, adding to the $20 million raised the previous year. The notes are converted into shares at a 20% discount on the IPO.

Sharp minds on board

What Beforepay has in its favor for navigating its rocky path to profitability is a few big Australian banking and fintech names in its corner.

Among those willing to lend their reputation to the company is Hartzer, who left Westpac after the AUSTRAC scandal. Former Westpac Chief Strategy Officer James Twiss is the CEO.

Former Afterpay CFO Luke Bortoli has raised his hand to join the board once he is listed, joining former Pepper executive Patrick Tuttle and Natasha Davidson, a capital markets lawyer with extensive experience.

Vocus founder James Spenceley, who was in the running for a seat on the National Australia Bank board, is an investor and is believed to be actively involved.

These sharp minds clearly see something the investors who quickly passed on the deal do not.

One name missing from the board is the company’s co-founder and main shareholder, Tarek Ayoub. He and co-founder Guo Fang (Dean) Mao own more than 20% of the company and have agreed to an escrow period.

The couple left the board in mid-July 2021. Ayoub founded the company, which was previously called Cheq, and it’s unclear why his involvement ended (this question was also asked to the society).

So, a founder-led company, it’s not. It also cannot claim to buy now, pay later because there are no installments and customers, not merchants, pay the bill.

Where Beforepay replicates Afterpay is by taking advantage of a blind spot in the lending rules. Whether it is about creating virtue and value is what is hotly debated.

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