James runs a popular bar and restaurant on Lenana Road in Nairobi, Kenya. Not so long ago, James ran out of stock during every big football or rugby match, forcing him to turn customers away. Anticipating demand was never the problem – James simply couldn’t get a bank loan to replenish his inventory in time.

Until recently, James -- and hundreds of thousands of small and medium enterprise (SME) owners just like him – simply couldn’t access the capital needed to run a successful business. They fall into what’s known as the ‘missing middle’ – a gap between microfinance and commercial lending that precludes SMEs with limited data and collateral from access to finance.

Enter alternative lending

James may not have collateral or robust records, but he does receive payments via debit card and mobile money, which means a percentage of his receivables is verifiable. In November last year, our company, Kopo Kopo, offered him an unsecured merchant cash advance tied to his receivables. Though more expensive than a traditional loan (the fee is typically 15% - 20% of the advance amount), James accepted the offer because of its immediate turnaround time and flexible payment terms. James has since repaid the advance and taken two more, which he’s used to replenish stock and launch a catering division.

Around the world, companies like PayPal and Square offer services similar to Kopo Kopo’s merchant cash advance service, “GROW.” By factoring customers’ electronic receivables, these companies can anticipate customers’ propensity to repay and recognize any unusual or suspicious variance. This transforms a customer’s transaction history into a pseudo-credit history. For collections, Kopo Kopo automatically deducts a mutually-agreed percentage of the customer’s daily sales until they’ve completely repaid–however long that takes.

Since disbursing the first GROW advance in late 2013, Kopo Kopo and its underwriting partner, AFB, have disbursed more than US $1,000,000 to hundreds of SMEs across Kenya. The advances have been used to launch new business divisions, refurbish premises, weather seasonal valleys and open new supply routes. On average, customers borrow as little as US $2,400 and repay their advances within 2-3 months. Of those that have completely repaid, nearly 70% have taken another (and often larger) cash advance, indicating a continuous need to smooth the ebbs and flows of daily business.

Alternative lending services like GROW are becoming relatively common in Europe and the United States, but remain few and far between across the Global South. Like James, millions of creditworthy business owners struggle to access capital for their businesses. They represent one of the biggest untapped markets of our time, and the opportunity for disruption is ripe.