We use an automatic borrower loan eligibility assessment model: "Magpie". Magpie is built using machine learning algorithms on large amounts of data collected by October over the past 5 years across different countries. It is constantly improving as we collect more data and apply cross-country learnings.
Magpie estimates the probability of payment default (PD) of a company and scores it from a scale going from 1 to 5. A Magpie score of 5 means that the probability of default is very high. Normally, Magpie score 1 equals a credit score of B and Magpie score 2 is a C, while others are not eligible for a loan and thus do not get a grade.
We rely on Magpie to make faster credit decisions for the following projects:
- With a Magpie score of 1 or 2,
- That are covered by a state guarantee,
- With a loan amount between €30,000 and €250,000.
These projects, that are automatically analysed using Magpie, are called Instant projects. All projects that fall outside these criteria are analysed using our standard credit analysis.
How does it work?
Let's assume you are the CEO of a company and request €100,000 for expanding your delivery channel. What will happen?
- First you will test your eligibility to an October loan with our Quickscan, where we ask you to enter your company name, loan amount requested and the reason for your request.
- Based on the company name: Magpie gathers data from public and private data providers, such as the chamber of commerce, to check if your company matches our eligibility criteria: at least €250,000 turnover, profitable and 2 years in existence. Magpie automatically analyses documents submitted by you, such as bank statements and annual reports. Magpie compares your company and request to similar companies, in terms of size, activity and location. Magpie predicts your capability to repay the loan, i.e. your probability of default.
- When your company gets a Magpie score of 1 or 2 your company will be presented a loan offer.
- If you accept the loan offer, our financial analysts and operations teams will conduct compliance checks and confirm that your company is eligible for a state guarantee.
- Your loan offer will be sent to our international credit committee for a final approval.
- Our operations teams will conduct anti-fraud checks.
- Your project will be presented on the October platform for lenders to invest. When your project is fully financed, the money will be transferred to your company's bank account.
How is this different from the standard credit analysis?
With our standard credit analysis our financial analysts are in charge of collecting the quantitative and qualitative information necessary to assess the risk of a project. For example, they get information from annual reports and insert it in our scoring model. They would fill the scoring model, automatically or manually, with a lot more information about a company's financial results, market outlook and management team. The scoring model generates a credit score and an interest rate that would be offered. This is what we call underwriting.
For Instant projects there is no analyst involved in underwriting. Instead, with Instant projects we rely on Magpie to make a faster credit decision. The role of analyst will include verifying the company's eligibility for a state guarantee and other compliance checks. There will be no meeting with the borrower, although we will verify a borrower's identity with a video call.
For Instant Projects, the FCCR (i.e. ratio calculating the repayment capacity of the borrower) could be below 1. Why? The rationale is that the data we have accumulated shows the FCCR > 1 criteria is not as discriminating as one would imagine, when combined with other factors, as we do in Magpie.
Lending to Instant projects
There are 2 kinds of projects on the platform: Instant and Standard. You can recognise an Instant project by the project description. The project description of Instant projects is standardised and contains less information, because this information is normally written by our financial analysts. Instant projects always have a credit score of B or C, depending on their Magpie score.
These Instant projects will be co-financed by retail lenders and the October fund, containing institutional investors and the management of October, like any other project.