Katrin Herrling was not what I expected. She’d been billed as a dairy farmer-turned-fintech entrepreneur, but there were no wellies or pails of milk in sight. It was all sharp suits, articulate arguments and polished professionalism. In fact, if anything, she looked and sounded more like a management consultant than anything else.
That’s of course because she was – seven years at Bain in its financial services department. The 500-cow dairy farm in Ireland’s County Wexford is her family home-from-home. But it is still the reason she quit her career in the City and bet the farm (not literally) to start alternative finance platform Funding XChange.
‘During the crisis, my bank decided that though I was a very good credit risk, I would be part of their solution to their balance sheet problem. My rates went up tremendously overnight.’ Herrling tried shopping around for better terms, but with no joy. She simply had to accept the harsher rates, which were all part of the quite rational derisking strategies she herself advised the banks on at a senior level.
‘I had this career where I spent my time with the big banks in London, advising them on their commercial strategy, but at that moment I realised I didn’t know as much as I thought I did,’ Herrling says. ‘If I don’t want a loan from the bank I was with, where do I go?’
At the time, alternative finance wasn’t much of an option, not least because it was so difficult to figure out what all the options actually were. This is where the idea for Funding XChange comes in. It’s a platform that turns the typical credit process on its head. Instead of you approaching twenty different lenders, you fill out a standardised form on the site and the lenders come to you.
‘We’re making it so any provider on the market can make you an offer,’ says Herrling, who has over 25 alternative finance firms on its panel, from challenger banks to peer-to-peer and invoice lenders. It introduces competition to the market, because the lenders can see the basics of their competitors’ offers, while also making it much quicker – a typical application takes five to seven minutes.
Crucially, Herrling says, it makes everything easy to understand. All the lenders have to make offers in a standardised format, so the small business can compare the details of the loan line by line. ‘I used my pre-teenage children to see if what we say about financial services products can be easily understood by an intelligent human being without any specific knowledge. They know more about financial services than any 12 year old should know.’
Funding XChange launched in June 2015 – several years after Herrling’s dairy farm faced its rate hike. There was a Eureka moment – or rather a ‘Eureka thirty seconds’ during which she decided the idea would be worth quitting her job at Bain for. She’s been leading a major report on SME funding (‘I made sure I was at the front of the queue’) for the EC, IMF and IIF.
After speaking to 300 top finance professionals across Europe, Herrling was presenting her findings, when a woman pointed out that there were a number of platforms in Germany allowing mediation for SME lending. ‘She didn’t say any names or details, it was just thirty seconds. A week later, I was on a plane to Germany, talking to those guys.’
Following that extended lightning strike, Herrling then benefited from the wind of good fortune. Olivier Beau de Lomenie, a serial entrepreneur responsible for building Ocado’s e-commerce platform, was a mutual acquaintance. She’d asked him if he’d do due diligence on some potential tech partners, when he suggested that he do it for her, from scratch.
‘This allowed us to overcome a key issue. We didn’t have to pay for all the technology to be developed but by making him a partner we could self-finance the minimum viable proposition.’
Herrling also believes that the opportunity came at the right time in her life. ‘There are two periods when you can actually afford to take this risk. Either you don’t yet have a career to leave behind, you don’t have a mortgage and kids at school, or you’re at a stage where you’re far enough advanced to have a little to fall back on,’ she says. ‘We’ve got just enough for everyone to be comfortable. If this goes south at any point, we’ll still be not homeless.’
The business is going any way but south. Herrling describes how she knew it was going to work last summer, at a team meeting in her daughter’s tree house at their farm in Wexford. Funding XChange had just signed an exclusive deal with KPMG to provide SME funding solutions and education to its customers, and was fast on its way to being designated by the Treasury as a mandatory referral platform for small businesses denied loans by banks (this has since happened). ‘We were looking at each other in the eye from across the table and there was this real sense that the wind was behind us.’
Herrling says Funding XChange’s future is tied to partnerships with major financial institutions, which will give it exposure and overcome the crucial issue of trust. It may sound very big league for a young start-up, but Herrling is keen to point out that actually KPMG came to her and asked for exclusivity. 'It is refreshing to see KPMG lead the innovation in small business accounting. Other big guys are associating with start-ups because they feel they’re becoming irrelevant or are irrelevant in the SME space.’
Herrling unsurprisingly predicts alternative finance will keep growing (it’s currently about 20% of the small business lending market), because small businesses need it and banks can’t give it. ‘Every time banks see requests for £50,000, they cringe,’ Herrling says. Their need to conduct four-day audits and liaise with risk committees means it only really works above £1m. Funding XChange's average is £30-40,000.
Alternative finance providers don’t have any such problems, which means the big players want to be able to offer them as alternatives to customers that otherwise they’d have to turn down. For the likes of Funding XChange, then, there’s not an Irish rain cloud in sight.