FlexFin: Not your typical fintech story

Alex Kelaiditis, co-founder of the factoring and cash flow management fintech FlexFin, discusses why factoring has emerged as the core financing tool for SMEs in Cyprus and Greece, thereby fuelling the startup’s exponential growth, which is tipped to reach €200 million in financed invoices in the third quarter of this year.

FlexFin is not your typical fintech story, in which a couple of young, ambitious and overly caffeinated programmers build code inside a stuffy room. In fact, Alex Kelaiditis, one of the two men behind the factoring lender, likes recalling their different origins. In 2016, while working as Chief Investment Officer for Dolphin Capital Opportunities, an investment firm focused on exiting big hotels in Greece, Kelaiditis, who had previously made a name for himself in the debt and fixed income space at UBS and Goldman Sachs in London, was approached by lifelong friend Dimitris Vranopoulos (their relationship goes as far back as elementary school and their paths kept crossing every few years), who was aware of the fact the finance space in Cyprus and Greece was full of gaps. At the time, Cyprus was reeling from the collapse of its banking system (and facing a €10 billion Eurogroup bailout bill and a haircut of savers’ accounts) and the closing down of its second-largest bank, while the Greek economy was clinging on by its fingertips. “Even though the banks had massive losses on their portfolio, Dimitris had discovered that the factoring space was not only holding up but it had remained profitable throughout the crisis,” says Kelaiditis.

One of the constants across industries is that buyers want to keep hold of cash, and delaying payments to their suppliers is a surefire way to indulge in their frugality. While the EU introduced the Late Payments Directive in 2011, which aimed to protect suppliers, late invoice payments remained a serious problem for SMEs. In 2019, the European Central Bank discovered that suppliers in Cyprus and Greece experienced some of the longest delays: 79 and 94 days respectively. It also highlighted that if all invoices were paid on time, SMEs in the euro area could save up to €158 billion per year in financing costs. Factoring invoices, then, emerged as a cheaper and faster alternative for these hard-pressed suppliers and nowadays, online lenders like FlexFin have given an old tool (it goes way back to Mesopotamia) the digital treatment, with all the associated benefits. There are different ways to go about it, but the basics are the same: a factoring lender leverages the low credit risk of a buyer (e.g. a supermarket) to pay the supplier promptly. The supplier hands over the invoice to the factoring lender which, in turn, will disperse a percentage of the money. In the case of FlexFin, when a supplier enters the proverbial door, it will receive 80% of the money in two weeks and the rest when the buyer fulfils its obligations, keeping 3% for its troubles. Kelaiditis mentions that FlexFin is very clear about its fees from the get-go, sometimes to its own detriment.

There are different ways in which factoring lenders can raise money. FlexFin initially raised €9.2 million in an equity round, led by the National Bank of Greece, and most recently via debt financing from the UK investment firm Fasanara Capital. “Factoring,” Kelaiditis stresses, “is a sustainable financing tool because you can never overborrow; you’ll always have a sustainable amount of leverage on your book that has a specific source of repayment. This is hugely important and it was one of the reasons behind the crisis in Cyprus, where you had companies receiving loans on the basis of some fixed assets but without a source of repayment. Factoring gives suppliers peace of mind.”

In 2017, according to the EU Federation for Factoring and Commercial Finance, Cyprus and Greece had two of the smallest factoring markets in the EU, representing 11.1% and 9.5% of their respective GDP – one would assume a more widespread penetration given the two countries’ relationship with late invoice payments. Factoring, though, was offered exclusively by incumbent banks, which lumped it in with their suite of corporate lending products, attaching a painstaking credit assessment that turned off suppliers greatly in need of liquidity. Startups in the chain suffered a similar fate although, this time around, the banks simply didn’t know how to quantify the unquantifiable. “I think every small business owner will attest that any bank relationship they have is not the happiest,” Kelaiditis mentions.

After debating and understanding the gap in the two markets, which fell squarely within the realm of their expertise – it was all about giving and taking credit – the two men took the plunge. By May 2017, Kelaiditis had resigned from his position at Dolphin Capital and, together with Vranopoulos, focused on getting FlexFin off the ground with the first order of business going through the rigmarole of obtaining a licence from the Central Bank of Greece, becoming the first non-bank factoring lender in the country (the market in Cyprus is unregulated).

FlexFin is one of the few fintechs to consider Cyprus and Greece as a unified market. Its team of 20 is mostly stationed in Athens, with Kelaiditis travelling back and forth between the two countries. In 2019, having finally acquired its licence, FlexFin launched in both countries at the same time. Alas, the two men had underestimated how challenging it would be to earn the supply chain’s trust. Factoring was still thought of as being part and parcel of the banking system, while both Kelaiditis and Vranopoulos were unknown quantities to suppliers.

“Nobody had heard of FlexFin and we were asking them to effectively hand over their communication with their biggest buyers,” he recalls. They tried to remedy the situation by speaking to every media outlet that would have them and booking as many trade shows as possible. Interestingly, what gave them the most exposure was good old word-of-mouth advertising, as some of the big buyers started talking about this new factoring lender that could take care of business. But then, the pandemic hit.

Government-mandated lockdowns resulted in a reduced business turnover for suppliers, with government subsidies and programmes, from social security contributions to taxes, keeping them on life support. As the world returned to some semblance of normality and economies reopened, the war in Ukraine shorted the energy market, with Russia cutting off the gas supply to mainland Europe. This, combined with pent-up pressure from the pandemic, brought about another bout of uncertainty through rampaging inflation. The ECB’s efforts to curb it by raising interest rates once again cut off financing avenues for the supply chain. Demand for factoring picked up significantly as inflation in the EU soared to decades-long highs, reaching 9.2% in 2022. By November 2021, FlexFin’s growth had passed the €10 million mark in financed invoices, adding another €90 million in the following eighteen months. By the third quarter of 2023, it is expected to reach €200 million.

Besides financing, FlexFin also manages the collection, management and monitoring of the receivables. “You don’t need to build the muscles to collect a cheque; we do that for you. So, that takes away some of the headaches of having to reconcile your ledger,” Kelaiditis notes. And, like most of its kin, FlexFin offers a far better client experience than incumbents (especially in Cyprus). In November 2022, it switched from a third-party platform to its own, as part of a three-pronged strategy that included funding, onboarding clients and streamlining the client experience, in that order. “Being able to upload your invoices online, choose which ones you’re going to finance, and monitor your cash flows are really big benefits for SMEs,” he says. In the medium term, he adds, FlexFin wants to expand its product offering, starting with purchase order financing (it’s like factoring but financing comes a bit earlier on the transaction side), although this is a riskier product that needs to be deployed carefully. The end goal: To create a finance hub for SMEs.

Over the past year, factoring penetration in Cyprus’ and Greece’s GDP was 13% and 11% respectively, a number likely to go up as the banking system in both countries starts to consolidate as a response to volatility, cannibalising products and allowing online lenders to eat up more market share. It is likely that the industry will grow even further as SMEs familiarize themselves with alternative financing methods, an education that started a couple decades ago when the first modern online lenders appeared on the scene. Alex Kelaiditis mentions that the company now intends to increase its marketing budget, which had been reined in for a while as demand was more than FlexFin could handle. There’s good reason to believe that the arrow on the growth graph will maintain its J-shaped curve, given that, in Kelaiditis’ own words, factoring has always been the core financing tool for the supply chain.

(Photo by TASPHO)

This interview first appeared in the June edition of GOLD magazine. Click here to view it.