October loans have a fixed interest rate and are amortizing monthly, sometimes combined with a grace period or a balloon payment. The interest rate that we charge borrowers, or pricing, is determined by the following factors:
A benchmark for our pricing is the interest rate in the market. In line with market standards, we use the last end of month 3-year Euro Interest Rate Swap as a reference. Click here to follow the movements of the interest rate swap.
A company’s country of Origin
The economic, business and legal environments differ per country. These factors affect the risk of lending to a company from a certain country. To account for the differences per country, we use the gap between the last end of month respective 2-year Government Bond rate and the last end of month 2-year German Government Bond rate as a reference. The rates are normally lower in countries where the general risk of lending is also lower. Click here for a useful source for daily government bond rates.
A risk premium
Lending to SMEs, like you do through October, entails a risk that your investment is not repaid. A risk premium, or in this case a higher gross interest rate, is the compensation for that risk. Therefore, on top of market determinators defined above, we target a risk premium between 3% - 5% on the whole portfolio. In case of negative bond rates, the pricing will not go below the risk premium.
A company’s credit score
October uses an internal rating system that combines multiple elements to assess and predict the creditworthiness of a borrower. The score ranges from A+ to C-, whereby A+ projects have the highest presumed creditworthiness. The pricing for a project with a higher presumed creditworthiness is lower than for a project with a lower presumed creditworthiness, to compensate for the extra risk per project. Please see our credit score policy for more information.
The type of analysis applied
October has two different credit analysis processes: Instant Loan and Standard Loan. For each Instant or Standard Loan, all automatic analyses are performed by October tech tools, all external data are collected and analysed and a credit score is calculated. For Standard Loans we apply more manual due diligence on top of that, in the form of a video call with the company and generating an expected future financial performance model. Our credit score policy contains more information on our different types of analysis.
For a Standard Loan, we have the option to differentiate +/- 0.5 percent point from the pricing determined by the model, for Instant Loans not.
The level of security
October has defined 3 levels of possible security for each project:
Unsecured: loan only secured by the company’s cash flow generation
Mid Secured: loan secured by at least a 100% valid personal/corporate guarantee or a 50-80% state guarantee
High Secured: loan secured by 80% or more state guarantee or a state guarantee and a valid personal/corporate guarantee to secure the loan portion not covered by the state guarantee (e.g. 65% state guarantee + 35% of personal guarantee)
The level of security impacts the pricing. The higher is the level of security the lower the risk premium, to factor the higher recovery expected in case of a default.
The duration of the loan
As said, the benchmark for our pricing is 2-year government bond which is aligned with the expected duration of a 48 months loan, which is the benchmark average term of our offer. The longer the loan, the longer the invested capital remains illiquid. To reflect the reduced risk for a shorter loan and the increased risk for a longer loan, we differentiate +/- 0.3 percent point for every 12 months that the loan duration deviates from the 48-month baseline.
The ESG score
October assigns an Environmental, Social and Governance Score (ESG Score) to every borrower. The score is built by October, combining three different data sources:
Internal company data, extracted internally by October directly from the identity and financial documents of borrowers
Industry- and country-specific data, from a contracted external data provider
Public, open-source data from sector-specific, internationally-recognised databases
October has identified 30 indicators, based on the available data, as key to measure a borrower’s performance in light of ESG. Every borrower is scored from A to E, whereby C is the benchmark. Companies that score higher than C get up to a 0.2 percent point discount, while companies that score lower than C pay up to a 0.2 percent point premium.
Pricing trends and underlying dynamics are constantly monitored by the October teams.
In addition, at Group level, by the 15th of every month, the October Chief Risk Officer (CRO) updates the monthly 3-year Euro Interest Rate Swap and the monthly 2-year Government Bond rates. The outcome is analysed and discussed by the committee (the “Pricing Committee”). This Pricing Committee consists of 7 members: CEO, Global CRO, Country CEOs, and Head of Institutional Investors. The Pricing Committee is validly constituted if at least 3 of the members are present. Votes are taken if a majority votes in favour. In case of a tie, the vote of the CEO counts double. The Pricing Committee will focus on rate changes at global and country levels taking into consideration the main macro-economic factors and the industry dynamics.
Any month-over-month increase in the rates of the relevant 2-year Government Bond will be reviewed as followed:
Increase of less than 0.2 percent point will be considered acceptable and no action will be taken.
Increase between 0.2 and 0.5 percent point will be discussed and decision on a potential adjustment will be made if a majority of the Pricing Committee votes in favour.
Increase of more than 0.5 percent point will require immediate action for a pricing adjustment. The extent of the potential adjustment will be made when a majority of the Pricing Committee votes in favour.
Next to the interest rate, October can charge a fee to the borrower and the lender. We will make a distinction between fees for the borrower and fees for the lender.
Fees for the borrower
Crowdfunding services fees: a single upfront fee for accessing crowdfunding services between 3% and 4% of the loan amount paid to October.
Management fee: a monthly fee for the ongoing management and servicing of the loan between 0.75% and 1% per year of the loan amount paid monthly to October.
Renegotiation fee: a single fee for renegotiating the terms of the contract of 1% of the outstanding amount with a minimum of €1000 per occurrence, paid to October.
Voluntary early repayment fee: a fee of 4% of the amount that is repaid early, of which half is paid to the lenders and half is paid to October. This fee does not apply in the case of a flexible bridge loan.
More details are provided in each loan agreement.
Fees for the lender
Lenders currently don’t pay any fee to use the platform.
Changes to pricing policy
Any pricing change decision will be shared with internally and externally. The changes will be embedded in the tools that we use to grant the loans, taking into consideration deployment time. Any commitments reached with borrowers will be honoured at the agreed upon pricing (offer made before the expiry date or contract signed), regardless of changes in the pricing.
The applicable interest rate, together with the applicable fees for each project, are validated by October IFP before the publication of the crowdfunding offers on its platform.