Funding Innovation in The Construction Industry - With Clinton Thomas - Lula

Greg Stewart: Welcome to No Free Lunch, Africa's freshest business and tech podcast. With me, your host, Greg Stewart. Our conversation today is around the construction industry and the challenges facing smaller startups and SMEs in the industry. And joining me today to discuss this is Clinton Thomas, the head of product at Lula, a leading South African fintech company that provides business banking, funding, and financial solutions tailored for SMEs.

Clinton has a strong background in product management. delivery and business analysis. ⁓ And joined Lula in twenty twenty two and leads the product team focusing on building customer centric features that directly address ⁓ SME cash growth and operational challenges. Welcome to No Free Lunch, Clinton.

Clinton Thomas: Thank you, Greg. Thank you for having us. Greg Stewart: the reason for our discussion is you recently did a presentation at the Big Five Construct Expo ⁓ and you presented a compelling industry at the expo that provided some interesting facts around the SME sector in construction today. And and one of the the key points you made was that construction SMEs are not asking for finance because they are weak.

often one looks at at this kind of thing and says, Well, you know, people are looking for funding or financing because they don't the capital themselves. But there's a whole lot involved with that. And some of the things that you mentioned was many need funding because they're growing or they're scaling. And also some of these construction projects cost a lot of money and there's a of cash flow pressure, just ⁓ buying the goods required build, is often a challenge.

So want to talk us a bit through that and just unpack that for our audience, please. Clinton Thomas: Thanks, Greg. Yeah. So when when we're looking at our construction industry, and Lula's done business with and partnered with many of the construction industries.

⁓ we we provide business funding, but it's not just about the value being in the funding itself, but it's about the speed it allows, the simplicity, understanding how ⁓ SMEs actually work. ⁓ this is the the the part where Lula wants to step in. So when we look at these business owners, you know, many of them, especially in the construction industry, they don't have the luxury of waiting a couple of weeks for finance to come through. You know, when an opportunity comes through or there's a pressure point, they they need to get very quick, fast access to that funding.

In construction, especially, when they win the contract, that's the beginning and that's when the pressure really starts for them. They've submitted the tenders, they've submitted all the documentation and You know, at that point there could be, you know, a form of celebration. We've got the deal. But then the pressure really starts because now, as you say, as you're stating, we need to obtain the the necessary materials.

We need to mobilize a labor force. We need to get subcontractors, equipment, fuel, etc., transport. All of these things are needed now.

And if we delay that process by looking for funding and waiting, you know, two weeks, three weeks, that means potentially for a month that site is standing still. And it's great when we have the opportunity when we can have this agreement with our customer that, you know, they pay a form of a deposit and there's sufficient deposit that is paid upfront in order for us to mobilize these things. But the reality is for many of our contracts we don't have that. We don't have that necessary deposit in place.

And that's where we want to partner with the construction industry specifically. We deal with many in all industries, but specifically in this sector, it's that point of Greg Stewart: Yeah. Mm. Clinton Thomas: Being awarded the contract all the way through to actually then getting paid later, everything in between needs to be funded and all of that needs to mobilize very quickly.

And that's where Lula wants to provide SME support. Greg Stewart: you also pointed out the disparity in size of advances required in the construction sector. And that I think that's quite a key factor here because construction projects in general are are costly. ⁓ so you out that the average construction advance that you're looking at is is greater than other industries.

⁓ And that Around thirty-seven percent of construction advances are over a quarter of a million Rand. ⁓ nearly ten percent of construction advances exceed one million Rand. I know that Lula provides ⁓ funding ⁓ as as I think fifty million, or ten million rand. If I'm I think I may have got my my numbers wrong there.

But I think Clinton Thomas: It's yeah, so currently five million, yeah. ⁓ unsecured. Greg Stewart: Five million. So up to f up to five million Rand.

So how does Lula ⁓ that risk? What what is Lula doing differently to other finance houses that enables you to manage that risk and provide payments in such a short period of time? Clinton Thomas: So within Lula, we we it our secret right? And our secret source is ⁓ that those models that's been over the last 10 years.

So the financial models that's been built that looks at what is the financial health of the business, what is the business's health, ⁓ but also, you know, ⁓ how concentrated is their income. based on that, we can also look have a look at the industry as well as those customers ⁓ of our customers. So it ultimately comes down to the models that we use where we've got factors and features that we pull in from the credit bureaus, we've got the financial information that customers share with us, and that might be bank statements, but also giving them the ability to integrate with other tools.

So their financial tools, ⁓ their banking tools, et cetera, in order to share that data with Lula. So having the access into their bank transaction history. that they share with us, ⁓ having access to financial statements and management accounts. When we use all of those things, we actually use all of those factors and we push those through our models to come out with a risk factor.

And then we've got a team ⁓ ⁓ ⁓ they specialize specifically in just looking after business health. And when they've ⁓ our tool in order to get an output of what is it that we are willing to risk in in this sense, They also do decisions on that. And these are qualified professionals in our credit space that would then speak to what are we comfortable to fund these businesses with. So when we start out, we do find that the amounts would generally be quite lower.

We start learning the behavior, the payment behavior of our customers. ⁓ But also where do they come from? And all of these things, these personas has already been built for us. And then we look at your business.

And what does your business financials tell us? What is the history? What does your payment history look like? And then what does your future revenue potentially look like?

in terms of your forecasting. So we take all of those elements into account, ⁓ then we come up with a point where we say this is what we are comfortable, where we feel the risk ⁓ balanced on Lula side, but also it's responsible. It is something that the company can actually afford to repay. And we're not going to put them in a worse situation than they are right now.

Greg Stewart: Yeah, and that's very important. I mean, getting finance is one thing. ⁓ finance that cripples your business is is another. And I've seen that with other small businesses, other businesses, companies that s ⁓ supply goods and that import goods from overseas.

And then ⁓ they're having to buy product up front, they're to pay VAT up front on the import, ⁓ you know, import duties and all sorts of other things. before they've even got a cent out out of their actual customers. And that can cripple a business. that can definitely, you know, curtail a business's opportunity to scale ⁓ and in fact can a business if the finance charges are then too high.

So finding that right balance and it's good to hear that Lula focuses on making those payments affordable for them in terms of what they're expected. revenue outcomes are. So moving on, providing working capital can certainly be an advantage as we've discussed. others might argue that can be profit reducing in essence if a company's got the right kind of funding available to them it often ⁓ Clinton Thomas: Absolutely.

Greg Stewart: Creates profit opportunity that it allows people to ⁓ goods at better price ⁓ because can pay up front or mobilize for faster new projects or run multiple projects at a time ⁓ and tackle some larger contracts that they otherwise would not have been able to afford. Talk to us a bit about that and what you've experienced in industry. And where you've seen this actually play an active role in building companies revenue. Clinton Thomas: what we do see is in ⁓ many industries, but it especially the construction industry, we're seeing finance ⁓ becoming an enabler of scale.

moving our SMEs with the right partnership with the right amounts that we're putting in front of them, as you've just stated now, you know, you you don't want to get to a point where you've got So much that you've created in terms of debt, you've done all the purchases, you've paid the VAT, etc., and you haven't actually even sold anything. but how do we create a partnership that we can actually take those SMEs from survival mode into growth mode? ⁓ and that's what we're looking to enable.

So ⁓ we've got that right partnership and we've got a meaningful relationship where we understand what is happening within that construction industry, within the Companies, but also just understanding how project-based income works. That's where we want to partner and say, how do we then understand and assist when that timing pressure becomes so great that you can't actually survive anymore? And how do we turn that into growth? So for us, yes, being able to bulk buy so that we can get the discounts, being able to mobilize faster, mobilize more, run multiple sites, multiple projects.

That is what we want to enable our customers to do. So putting the finance products in front of them, they might qualify for a 5 million Rand facility, but they don't need 5 million Rand right now. They need 500,000. They have access to that 500,000 and they can get it in less than a day.

They start that work, and as they get paid 60 days, 90 days, 120 days later, that funding starts coming back. And with our cost structure, that does mean that even though it was taken over a 12-month period. If you settle within three months, you pay the fees of the months that you've used. And there isn't a penalty.

There isn't a further interest that you have to then be penalized simply because you've settled earlier. So you've got access into that finance. And where this becomes for the business is because we have these integration options with our financial products and the banks of our customers, as well as getting the information from them. ⁓ we've got better data.

Greg Stewart: Yeah. Clinton Thomas: And we've got we make better use of it. We understand the cash flow and the trading behavior better. And that means we can actually scale these businesses relatively faster than you know just a traditional funding partner, like a funding partner where they simply just send the money out and they expect payments to come back.

And because we are constantly having conversations in a relationship with our customers, we actually understand what their businesses are doing while also providing them with opportunity for it. So for me, Greg, it it does come from that point of how do we enable the scale so that we can move these companies out of survival mode and actually into growth mode using this fund. Greg Stewart: Yeah, and I I like what you've just ⁓ in terms of that you're actively involved in the process and the business and understanding what's happening in that business.

I think that's a failure of many financing structures in that especially in traditional banking where you know they'll they'll advance you money, but there's no active engagement or involvement in the actual process to understand what's happening on the ground and within the business. And that That kind of sets what you guys have done aside from from I think a lot of other players out there in the marketplace, doesn't it? Clinton Thomas: No, definitely. And and it does move you from the point of, it changing from a funding event to a funding relationship.

⁓ and that's a relationship where we're enable that scale rather than it being a, you know, ⁓ single of funding and then you've got the repayments happening. And then next time you come through, it's almost like it was wiped clean and we just have this fresh start again. Because we understand as businesses, we create that relationship rather than an event. Greg Stewart: Yeah.

Yeah. Last thing just for me, it was something that really struck me about your presentation. You said that the next generation of construction SMEs will not only be built with brick, steel and cement, they will be built with smarter finance, faster access to liquidity ⁓ and who understand the pressure of delivering before being paid. And I think that kind of sums it up what we've been talking about.

do you do you wanna maybe ⁓ Talk us through a couple of examples where this kind of smart financing and and different relations partnership relationship has actually translated into a business scaling and growing. Give us an example or two maybe. Clinton Thomas: No, absolutely, Greg. if I take an example, ⁓ there's ⁓ a business they were actually also at the at the expo.

⁓ they provided some feedback on their experience with us. ⁓ So with this business, ⁓ they've done is they use ⁓ a product called Zero for financials, ⁓ and they've integrated that into their Lula space. So we've got a direct integration where it then has the ability to pull. Transactional details.

So they've done that and initially started off with a relatively low amount, and relatively low meaning it's below the average. They started with a hundred thousand Rand. And the 100,000 Rand was just for them to take on a project that was slightly bigger than what they would normally be able to fund themselves. I their repayment at that point was 60 days after being awarded.

So it was that gap that needed to be filled. But they ⁓ they went ahead with that, they started their project and they linked their accounts. And what we were able to do is because we've got constant access to those accounts, we can look at their payment behaviors, we can also look at the other transactions that's coming in. ⁓ there's a point where we can then start saying, But look, you've now got your next project that's coming up, and usually these are prohibitive because I don't have five hundred thousand or I don't have one point five million in order to take on that next project.

I just can't fund that. And if I do fund it, Greg Stewart: Right. Clinton Thomas: The fees itself is just going to cripple me. And it was having access into that smarter funding that because of the access into the financial statements that we have, because of the constant information coming through, the data that we can pull through our models, we were then able to up their amount consistently.

And as they took on, I think it was three months later, they took on another project. We increased their facility to 250,000 and they used 200,000 of it. And Then start to repay. Six months after that, they were increased to six hundred thousand and they're currently sitting at a 1.

2 million facility, right? Which they use occasionally and they pay it back and they settle it and then they come in. But they now have gone from the stage of being able to, within two years, handle 70 80,000 Rand contracts to now being able to handle 800 to 900,000 Rand contracts. And that's the kind of scale that we want to enable through the SMARTA.

Greg Stewart: Yeah. Clinton Thomas: Finance and the ability to use the data that we have and then make decisions that actually scale the business. Greg Stewart: Yeah, Clinton, I I think that's marvelous. And we really need a lot more of these ⁓ success stories.

The the construction industry itself is has been a bit in the doldrums and it's really good news hearing that that some of these smaller companies and and that was the other thing, is a an industry that was pretty much dominated by big operators, are now seeing smaller operators grow and emerge. And and that really overall is positive news for the industry, isn't it? Clinton Thomas: Absolutely. It's it's one thing to take your big guys, you know, who very easily takes out two hundred, three hundred million out of one of their accounts and say, Let's go and build, you know, a thousand houses or low income houses.

But then you've got a thousand to two thousand SMEs that's, you know, just looking for that fifty thousand and contract just to survive. How do we support them so that they can actually take on the bigger projects as well? Greg Stewart: And ultimately as that fifty thousand small SMEs start scaling, they actually land up creating a lot more jobs than larger companies would. And that in turn is really good for the economy and for the growth in the country overall.

Clinton Thomas: Absolutely. And the recognition that that's deserved in the construction industry. I mean, they they generally on the on the work sites, they ⁓ not a lot of recognition. And I think what I found very valuable and meaningful from the construction or the big five construct expo was also the awards evening, where some of those, ⁓ know, up and coming companies, those that are delivering meaningful work, was actually recognized for their work.

And that that was very valuable to see. Greg Stewart: Yeah. Yeah. Fantastic.

Clinton Thomas, you for joining me on No Free Lunch. It's been great having a chat with you and good to hear some positive things happening in the construction industry across South Africa. Thank you for joining me on No Free Lunch. Clinton Thomas: Thank you very much, Greg.

All the best.