Andres Luts, Chief Credit Officer at EstateGuru, an Estonia-based peer-to-peer lender facilitating secured loans, is responsible for managing the platform’s credit policy across several different European nations.
Luts recently commented on how he approaches risk and how the platform assesses and evaluates borrowers. As noted in a blog post by EstateGuru, Luts discussed on the different challenges of operating in several countries (and jurisdictions). He also revealed how the company leverages both technology and human expertise to be “ultra-efficient and much more.”
Responding to a question about when it comes to borrowers, what criteria he uses to determine whether a company receives a particular loan (or not) and at what interest rate, Luts noted:
“Potential borrowers on EstateGuru’s platform are typically small and medium-sized companies (SMEs) in markets where there is a funding gap in the financial sector, which means that bank and other financing options are limited. To start with, we will check their history and check what experience they have. We obviously also look at their financial status, which means they need to be financially healthy and without any payment remarks, which means no tax issues or defaults and bad credit somewhere else.”
However, in real estate, lending is typically carried out via a Special Purpose Vehicle (SPV), so to “newly established companies created specifically for the project,” Luts explained. He also mentioned that it’s why they’ll also “ask the borrower to compile their track record and previous projects and evidence of their success and also the business plan of the new project if it is available.” He added that this would then cover the borrower’s side, however, as they’re real estate-backed lenders, they also “assess the real estate offered as collateral.”
He confirmed that this means they “look at the location, the market value, the valuation report methodology, and what it had previously sold for.”
Luts also noted that the desired or ideal borrower must satisfy the following requirements or conditions:
- Be “a legal entity (registered in EU) with one-year active business history (however EstateGuru doesn’t exclude applications where this criterion is not met including project-based entities).”
- Have “no active tax (except deferred) and other active payment remarks.”
- Have “no bankruptcy proceedings related to the borrower or related parties.”
- Have “no money laundering suspicions related to the borrower or related parties.”
He added that in terms of interest rate, EstateGuru has “a separate interest rate model and we also have an internal rating model.” He explained that they “put all the different aspects into these models, and they usually give out the minimum interest rate.”
However, since they’re basically a marketplace, they also “need to attract investors, especially when it comes to bigger loans,” so the interest rate model “could say that 11% is what this borrower qualifies for, but if the loan is like five million euros, then we need to add another percentage point for this market premium to get the investors on board.”
“So it’s a mix, the logic behind this interest rate. How many investors do we have in this country where the loan is? And what’s the current liquidity situation on the platform? This also affects the interest rate. Unlike a traditional bank, we have a more advanced interest rate policy.”
(Note: for more insights from the EstateGuru team, check here.)
As covered earlier this month, EstateGuru reported €320.2M in total financed loans since 2014, with a 7.7% default rate but no expected capital loss.