At the onset of the marketplace lending market, lending to businesses was equated with lending to small and very small businesses: businesses at the low end of the small and medium-size enterprise (SME) market who were borrowing on average under €100,000. However, as the alternative lending market matures, it seems to attract larger SMEs borrowing bigger tickets, north of €400,000. At the Paris Fintech Forum last month, I spoke with Oliver Goy and Tim Thabe whose companies embody this trend. I asked them about why larger SMEs turn to them and what it takes to serve this segment of business borrowers.
Olivier Goy is the founder and CEO of Lendix, an international business lending marketplace launched 2 years ago in France which has since then expanded into Spain and Italy. Tim Thabe is the co-founder and Managing Director of creditshelf, a German B2B lending marketplace for SME corporate borrowers and professional investors which launched in 2015.
Therese Torris: Your platforms have been noticeably successful at attracting larger companies as borrowers. How did this happen?
Olivier Goy: We have indeed attracted larger borrowers over time. It was not the result of a voluntary strategy but the results of these companies’ demand.
At the onset, we did not plan to serve bigger tickets. On the contrary, our strategic goal was to serve small and very small SMEs which we knew banks do not serve well. However, when larger companies approached us, we did not want to turn them down because it helped us grow faster.
To give you an idea: the average loan size projected in our business plan was €50,000. The actual loan size in our first year of operation was €200,000. Now it is €400,000.
We did not plan for this to happen, but we’re very happy about it. We find that our proposition resonates more readily among established firms. These firms have CFOs who are used to diversifying their sources of funding. Thus, it is more natural for them to turn to us as an alternative to banks. We were very surprised to even see publicly quoted companies come to us. We’ve done three campaigns for quoted companies.
Of course, our funding mix, the fact that 80% of our funding comes from institutional investors was key to achieving this. We could not have delivered the larger loans asked for by those firms if we had relied only on retail investors.
Therese Torris: Tim, you have quite a different experience in that your company deliberately targeted larger SMEs…
Tim Thabe: Indeed, we have deliberately targeted larger tickets. Our motivation was twofold. Firstly, we believed that we needed larger tickets to justify the expense of in-depth credit risk analysis. Secondly, the larger SMEs have more history and substance, and therefore more material to which we can apply this risk analysis in a meaningful way. Also, I agree with Olivier when he says that it is easier to deal with larger companies. They have chartered accountants who can quickly deliver the required financial documents. They also have decent corporate planning, which provides sensible business plans.
Currently, our average loan size is between €500,000 and €600,000. We expect it to grow towards between €800,000 and €1 million. The reason is that returning borrowers ask for larger tickets as they get comfortable with how we operate. Each successful campaign brings new prospects which tend to become larger as we become better-known.
Therese Torris: You’ve outlined the benefits of serving big tickets for your companies. But what is in it for them? They are larger established firms. Can’t they easily borrow from their banks?
Olivier Goy: Diversification of funding sources is one of the main reasons why larger SMEs turn to marketplace lending.
Tim Thabe: All our clients have multiple banking relationships, often good relationships with their banks on the lending side. But they often also have exhausted their credit possibilities with these banks. They have reached internal bank limits, or they do not want to provide additional, often personal, collaterals. We provide something that banks cannot easily provide: working capital, unsecured, short-term loans of up to 12-month duration.
Larger SMEs who have already pledged their assets to their bank and want to borrow on unsecured terms cannot go to another bank because banks do not like to lend on an unsecured basis and the firm’s cross-selling potential is limited for the additional bank. Many of our customers have cyclical needs.
For example, if a firm wants to finance a large project. If it has a good investment grade credit rating, the bank will follow. But if it’s a low BB or B, the bank will not lend it short-term working capital on an unsecured basis. And if it tries to be financed by its suppliers, it will cost it 2% a month!
Therese Torris: You’ve mentioned larger SMEs being easier to deal with because they have more financial clout, are there other differences, for example in default rates?
Olivier Goy: Bigger tickets are less expensive to recruit than small SME borrowers. However, the structure of larger SMEs is more complex, therefore is takes more time to analyze them and assess their credit risk. So far, we have not noticed a major difference in default rate, even though we know for a fact that there is a negative correlation between company size and credit default rate.
Tim Thabe: The inverse correlation between company size and default risk is true everywhere, hence also in Germany. But our concern is to provide value through our analysis, i.e. to pick the right borrowers within that segment and to price risk accurately and for that we need substance that we can analyze, that’s why we favor larger companies.
Therese Torris: On another note, what about regulation? Does it limit your ability to serve big tickets?
Olivier Goy: No. Not really. European alternative investment funds (ELTIFs) now make it easier to invest in larger tickets. We are voluntarily limiting ourselves to €2.5 – €3 million because don’t want to be exposed to a few big tickets. We’re very happy with small tickets.
Tim Thabe: At creditshelf, we don’t have a regulatory loan size limit because we use a fronting bank and because we raise funds for each project from a small number of accredited investors; 20 or fewer.
The main issue with regulation is that it is not consistent throughout Europe. We don’t have plans to expand to other European countries soon, but the lack of harmonization is a constraint, both on the origination and on the distribution side.
Therese Torris: Olivier, Lendix has expanded internationally, into Italy and Spain. Has regulation been a problem?
Olivier Goy: Not in terms of addressing big tickets. It is the same pattern throughout Europe. What we need to address big tickets is access to institutional investors. Lack thereof is what would put an upper limit on our business and that’s why we need to have local offices, to connect to local institutional investors.
Therese Torris: Is it indispensable to have people with institutional investor connections in the company to address big tickets?
Olivier Goy: It certainly helps to have people like Patrick de Nonneville who are very connected. But there should be no mistake, institutional investors are more interested in investing in small tickets. For them, small tickets are the truly new asset class to which we, as marketplace lenders, can give them access.
Tim Thabe: Most of us have a banking network. We speak the language. The notion of big or small ticket is relative. There is a gap between small SMEs looking for smaller loans, and midcaps who can raise private debt, it is this underserved segment of larger SMEs that we target. This is the gap we fill.
Therese Torris: Talking about debt instruments are you considering bonds, or in France minibons?
Olivier Goy: No. Issuing bonds is more complex than issuing loans. We’re not interested in the French minibons either as we can already address bigger tickets through ELTIFs.
Tim Thabe: We do not want to go from loans to bonds because it completely changes the process on the borrower side. If we wanted to offer securities to the investor side, we could always securitize. We are looking into it.
Therese Torris: In conclusion, what is your vision for the future for the mid-size/big-ticket market and for your company?
Olivier Goy: We’re very happy with small tickets. We save money on borrower recruitment when we serve large borrowers. We can use this money to recruit more small investors.
Tim Thabe: We believe that there is a gap in the private debt market reaching from very small tickets all the way up to ticket sizes of €10 million or €15 million where private debt funds are starting to operate and traditional private placements can be arranged economically.
Therese Torris, PhD, is a Senior Contributing Editor to Crowdfund Insider. She is an entrepreneur and consultant in eFinance and eCommerce based in Paris. She has covered crowdfunding and P2P lending since the early days when Zopa was created in the United Kingdom. She was a director of research and consulting at Gartner Group Europe, Senior VP at Forrester Research and Content VP at Twenga. She publishes a French personal finance blog, Le Blog Finance Pratique.