The risk analysis is performed in-house by our local Credit teams. The October financial analysts are in charge of collecting the quantitative and qualitative information necessary to assess the risk of the company and decide of the risk rating (i.e. interest rate) before its presentation to the October Credit Committee. In this tutorial, we will walk you through the credit analysis step by step.
Step 1: the eligibility test
The process starts with the borrowing company’s CFO (or the CEO, the accountant, etc.) doing the eligibility test (checking if the company matches the risk criteria of October) directly online. Within seconds (and just by typing in the name of the company and answering a couple of questions), the borrower knows whether its company is potentially eligible to a loan on October!
Our risk scoring algorithm by gathering public and private data on companies is able to automatically make a risk selection based on turnover, profitability and time of existence of the company in a few seconds.
Step 2: first analysis and meeting
If the borrower passes through the eligibility test, we ask to send us relevant files, such as financial statements, investment memorandums and bank statements. Our ‘X-ray’ internal tool automatically extracts relevant financial ratios and information from these documents and fills them in our scoring model that allows for a solid credit analysis.
The scoring model is filled with information about the loan, a reflection and a projection of the revenues, management fees and so on. This adds up to a total of 70 financial indicators, such as cash position, debt, accounts receivable, etc., that go back 3 years in time and 1 year into the future. This way, the scoring model shows the development of these financial indicators and gives insight in the financial performance. The financial performance of the borrower makes up for 60% of the credit score.
We always interview the borrower to ask any remaining questions. The interview serves another purpose as well: we do an assessment of the management qualities and relevant experience of the entrepreneur. 20% of the credit score is based on the management qualities of the borrower and its team.
Furthermore, we review the market outlook of the borrower and distinguish if the market is growing, stable or shrinking. Obviously, when the market outlook is negative, it also has a negative effect on the score. We also review what the position of the borrower is in the market and look at it’s marketshare. 20% of the credit score is dependent on the market and the borrower’s position in the market.
There are 3 sectors that we have identified with a higher risk and I will explain why:
- The construction industry: it is a cyclical sector. Big companies are better equipped to manage the invoicing of their clients. Smaller companies are totally focussed on their day-to-day business and forget to invoice their clients, which leads to liquidity stress.
- The bakery and the catering sectors: customers are faithful to the management of business from this sector (we talk about clientele intuitu personae). In the case of acquisition, the amount of customers could be misrepresented.
It is worth noting that these industries are riskier in the general population as well, construction companies have a higher default rate with traditional finance providers too. You can find the official statistics of the Banque de France here. We took that into account in our analysis; but what we have learned is that the risk of these sectors in the population which looks for financing on a platform is even more pronounced.
This scoring model is then combined with information from our huge database with all our past loans. Together with the financial elements, the team and the market outlook, it makes up the credit score.
Step 3: the credit score
The scoring model determines if the company project is doable or not. If a project is not doable, the project will be denied and it will not be presented to the lenders.
If a project is doable, our scoring model shows immediately what the credit score of this project will be. The credit score is not calculated on past performance but rather on a forecast of the company situation after receiving the October loan. The credit score ranges from A+ to C (from high to low creditworthiness). The interest rate, is determined by the credit score and the duration of loan. That is why interest rates within a credit score category can differ sometimes:
Step 4: the credit committee
We then present the project to the October Credit Committee, where a minimum of 3 international Credit Directors have to approve the loan. When they give their go-ahead, the borrower will be presented an offer. When the borrower accepts the offer, the project will be presented to the lenders.
Step 5: fraud prevention
To prevent fraud we cross-reference the information that we have available from the borrower with external databases. Also, we compare financial flows and data from the financial account with each other, to see if they align. To be able to check this, we always ask for the company's bank statements. Furthermore, we check who are the main customers and suppliers of the borrower and check whether the amount requested makes sense in light of the purpose of the loan. The final stage includes a background check on the entrepreneur and a check of the company’s statutes.
And that’s it! Our process from start to end. It is a substantial process that gathers a lot of information from a lot of different sources. You are always encouraged to read the project description and review the financial ratios yourself as well. With the 48 hour preview of projects you have time to discover the borrowers you will support!