Interest is both “the cost of borrowing money for a borrower and the compensation of lending money for a lender,” the team at October notes in a recent update.
As a lending platform, October explains they are “right in the middle and connect borrowers to lenders.” So, they have “to attend the needs of two sides of the same coin.”
October is tasked “with agreeing on attractive terms for both the borrower and the lender.”
Views on what “are attractive terms change, but never as disrupting as over the last couple months.” October reveals they have “responded by reviewing the pricing of [their] loans more frequently.”
In a recent update, October provides an overview of what has happened and what they’ve done.
As of late, you cannot watch the news without media coverage regarding inflation or rising interest rates.
As shared in a blog post by October, the ECB has a striking recap of what has been the source of it all:
Since Russia’s invasion of Ukraine, we have been “facing a situation in which inflation is too high but the economy is slowing.” Prices have “increased a lot owing to the war, especially for energy and food.” Many companies are also “finding it more difficult to get the materials, spare parts and workers they need for production, which is worsening problems that were already there because of the pandemic.”
In response to high inflation, central banks “have increased their interest rates rapidly. By making borrowing more expensive and saving more attractive, central banks aim to reduce demand for goods and services.” Next to that they “aim to reduce the expected inflation, to stabilise business prices and wages.”
The interest rate that October charges to borrowers, or pricing, is determined by several factors:
- A company’s credit score
- The risk-free return in a company’s country of origin
- The type of analysis applied
- The level of security
- The duration of the loan
The central bank interest rates “set the benchmark for the interest rates charged by financial service providers.” It also “increases the return on a risk-free investment, like some country bonds or saving money with the bank.”
Lending to SMEs, like you do through October, “entails a risk that your investment is not repaid.” Interest is “the compensation for that risk.” Therefore, the interest rate “has to increase to keep the same relative compensation for the risk. In other words the risk-premium has to stay the same.”
From 2016 till the beginning of this year the central bank interest rate “was 0, which meant that the risk-free return component in determining our rates was stable.”
In July 2022 the ECB “increased their interest rate for the first time in 11 years. The big question is whether it’s enough.” If inflation continues to be high, “it is likely that the central banks will keep increasing their rates.” Nonetheless, “it is expected that at some point central banks will decrease their interest rates too.”
Therefore, October have “changed the frequency that we review the interest rate that we charge our borrowers and made it easier to update the pricing in our systems.”
“We now have a dedicated pricing committee, consisting of specialists from the different countries that we’re active in. The pricing committee will monthly review what is the relative risk-free interest rate per country and propose a new pricing throughout all countries or for a specific country.”
They also mentioned:
“With this approach we’re able to match the responsiveness that the current market environment demands. We’re able to continue agreeing on attractive terms for borrowers and lenders, whether the central bank rates go up or down.”