Kafene, a lease-to-own startup aimed at underbanked consumers who don’t have access to traditional credit, raised $18 million in a Series B funding round.

While there are similarities to the buy now, pay later approach to making purchases, Kafene CEO Neal Desai emphasizes that his company’s model is different in a few ways.

For one, many argue that BNPL is just another form of debt — but packaged differently. Rather, Kafene’s agreements, according to Desai, are debt-free. Another way it differs, in his view, is that BNPL is often used for more “nice-to-have” purchases, while lease-to-own is primarily for “must have” buys, like refrigerators or tires, for example.

Essentially, Kafene’s model is based on the premise that at the point-of-sale, the prime consumer will probably go with BNPL, while the subprime consumer doesn’t have the credit score to do so and would typically do lease-to-own as their alternative financing mechanism.

Kafene, according to Desai, is out to boost financial inclusion by helping consumers, who don’t qualify for credit cards, a “flexible and affordable” option to make larger, necessary purchases. The company partners with merchants — currently mostly smaller and medium-sized retailers — to offer the lease-to-own option at the point of sale.

The startup’s model also differs from BNPL in that if a consumer decides after a few months that they can’t afford, or simply don’t want, a leased item, they may “give it back” with no penalty. In contrast, with BNPL you can only return a product based on the individual merchant’s policies. So, in essence, a Kafene user will have paid for using an item for however many months they were in possession of the product.

The advantage for merchants, the startup touts, is that they are able to close more sales, leading to increased revenue.

While Desai declined to reveal hard revenue figures, Kafene saw 500% year-over-year revenue growth, he said.

Kafene had most of its Series A capital still in the bank when it decided to raise additional funding in an effort to compete with BNPL and other financing providers. It plans to take its product up market to eventually cater to those at all ends of the credit spectrum, according to Desai.

“We raised this money to take advantage of the opening that the market provided by having traditional lenders tighten up,” he told TechCrunch. “We saw opportunities expand into the gap and serve some of those retailers that are seeing pullback from their other existing financing options. It’s a really nice tailwind and that was the logic for raising the Series B.”

Here’s how it works: Kafene buys the product from a merchant on a consumers’ behalf and rents it back to them over 12 months. If they make all payments, they own the item. If they make them earlier, they get a “significant” discount, and if they can’t, Kafene reclaims the item.

“The lease-to-own consumer has a cancellation ability, which is really important, especially when you think about the macro environment that we’re about to head into,” Desai told TechCrunch. “Having that built-in flexibility is super important for that consumer base.”

In addition, using Kafene’s offering can help people boost their credit scores, according to Desai. If they buy out of the loan earlier than the 12-month term, Kafene reports them as a positive payer and their credit score goes up. If they stop making payments without returning the item, however, their credit will be dinged. Their credit score will not be impacted if they return the item mid-agreement.

lease-to-own fintech startup kafene raises $18m to battle bnpl

Image Credits: CEO and co-founder Neal Desai / Kafene

“With the voluntary termination program, we will go pick it up and the agreement is dissolved,” Desai explained. “So if they made five payments, their credit will show five payments.”

Kafene’s underwriting model leverages more than 20,000 data inputs to inform AI-driven approvals, Desai explained. This means its financing is “tiered based on actual risk rather than one-size-fits-all,” and makes it less beholden to interest rates, he noted.

Because leasing is materially and legally different from debt, the company asserts, consumers are not charged interest. Instead, Kafene charges people who pay off their leases in the first 90 days a “nominal” processing fee that varies state by state (in California, it’s $0). About half its customers fall into this category, Desai said.

Those who make only the minimum payment over the maximum term do pay more but, according to the company, “most people are somewhere between.” At the far end of the curve, the highest is 2.5x in terms of total cost of ownership relative to retail price.

Only a minority of consumers buying with Kafene end up paying that much (which is a lot, to be clear) for an item, according to Desai. Eighty to 90% of those who work with Kafene end up owning the item they finance, he said.

And when a consumer decides to give back an item, Kafene has partnerships with infrastructure and delivery companies nationally that it pays to pick up the item. The company then has a series of resale and disposal mechanisms that allow it to either try and monetize the item or simply write it off.

Third Prime led Kafene’s latest round, which is on top of the nearly $30 million it raised last year in two tranches of a Series A funding. Global Founders Capital and Third Prime Ventures co-led the $15 million A1 round. Third Prime and Peter Thiel’s Valar Ventures led the A2 extension.

Uncorrelated Ventures, Company Ventures, Xffirmers, Gaingels FJ Labs joined Third Prime in backing Kafene in its B raise.

The company plans to use its new capital primarily to increase its headcount so that it can continue to expand its offering to more merchants and thus, consumers.

Wes Barton, co-founder and managing partner at Third Prime, said his firm was drawn to Kafene’s vision “that by leveraging proprietary underwriting and flexible payment structures, the company could reduce borrowing costs for consumers while simultaneously enhancing flexibility.”

“Since our first investment in 2019, we’ve been thoroughly impressed by the pace of innovation and the market’s demand for Kafene’s unique product,” he wrote via email. “With many lenders in retreat today, Kafene is leaning in, and will take meaningful market share over the next year.”

Founded in 2019, New York-based Kafene has 100 employees. It currently works with over 1,000 retailers across the U.S.

Reporter’s note: This story was updated post-publication to clarify the number of merchants that Kafene works with.

My weekly fintech newsletter, The Interchange, launched on May 1! Sign up here to get it in your inbox.

Keyword: Lease-to-own fintech startup Kafene raises $18M to battle BNPL

TECH'S NEWS RELATED

Amazon raises hourly wages by about $1 amid increasing union pressure

Last year, Amazon spent over $4.3 million on anti-union consultants alone, to which labor advocates asked, why not just pay that money to workers? Now, Amazon will do just that. Over the next year, Amazon will dedicate nearly $1 billion to increasing the average wages of its warehouse and ...

View more: Amazon raises hourly wages by about $1 amid increasing union pressure

Why build any fintech any more when you can just raise €20M and white-label it to banks?

Financial institutions have struggled to develop their own technologies, hence the rise of neo-banks which used Open Banking regulations to build their own Fintech stacks. That has led to a wave of innovation, and startups have hungrily devoured the opportunities to ‘platformise’ the financial work. The latest is fintech ...

View more: Why build any fintech any more when you can just raise €20M and white-label it to banks?

Binance founder Changpeng ‘CZ’ Zhao shares his vision of web3 opportunities at TC Sessions: Crypto

When it comes to the decentralized world of crypto, few single entities loom larger or carry more weight in the industry than exchange behemoth Binance. The blockchain giant processed $34 trillion in trading volume in 2021, it says, and the exchange shows few signs of resting on its laurels ...

View more: Binance founder Changpeng ‘CZ’ Zhao shares his vision of web3 opportunities at TC Sessions: Crypto

Meta plans hiring freeze, NASA shoots an asteroid, and Elon’s texts about Twitter are made public

most read audio roundup Hi all! Welcome back to Week in Review, the newsletter where we quickly sum up some of the most read TechCrunch stories from the past seven days. The goal? Even when you’re swamped, a quick skim of WiR on Saturday morning should give you a ...

View more: Meta plans hiring freeze, NASA shoots an asteroid, and Elon’s texts about Twitter are made public

The upcoming TripActions IPO has us hype

The IPO market is still frozen like a Nordic lake dotted with fishing huts, but there are signs that a thaw is now in sight. News from Insider indicates that TripActions, a unicorn in the corporate travel and expense category, has filed confidential paperwork to go public. Per the publication, ...

View more: The upcoming TripActions IPO has us hype

All Facebook and Instagram users in the US can now share NFTs, cross-post between both apps

Meta announced today that all Facebook and Instagram users in the U.S. can now connect their wallets and share their NFTs. All users in the U.S. also have the ability to cross-post the NFTs that they own across both Facebook and Instagram. The official roll out comes a few ...

View more: All Facebook and Instagram users in the US can now share NFTs, cross-post between both apps

This Week in Apps: Google goes visual, Twitter copies TikTok, OG app drama

Top Stories So we’re just TikTok-ing all the things now Google Goes Visual OG Drama Weekly News Platforms: Apple Platforms: Google E-commerce and Food Delivery Streaming & Entertainment Health & Fitness Government & Policy Security & Privacy Funding and M&A Welcome back to This Week in Apps, the weekly ...

View more: This Week in Apps: Google goes visual, Twitter copies TikTok, OG app drama

Welcome to spooky season in startups

A reminder that pivots work A different version of CVC, I guess The follow-up A few notes Welcome to Startups Weekly, a fresh human-first take on this week’s startup news and trends. To get this in your inbox, subscribe here. A multibillion dollar acquisition, IPO projections and some good ol’ ...

View more: Welcome to spooky season in startups

It’s unclear what will happen in VC in Q4, but it definitely won’t be boring

The rise of product-led growth is creating opportunities for startups

Google pulls the plug on Stadia

Tesla’s mythical Cybertruck will also be a temporary boat because why not

Stadia died because no one trusts Google

Build for the future now with Mammoth Biosciences and Mayfield

Firefly Aerospace reaches orbit for the first time

ONDC floats consultation paper on how e-commerce transactions will be governed

HSBC invests in Singapore’s customer intelligence and risk assessment startup

Microsoft says two new Exchange zero-day bugs under active attack, but no immediate fix

We’re all just a Hop, Skip and a Drive away from a better Hustle

7 steps to optimise your voice search SEO strategy

OTHER TECH NEWS

;