October has put in place an automated, systematic screening process of borrowers to ensure that only high-quality loans, with ensured financial health and capacity to repay, are selected. This occurs by triggering data-based eligibility tests first, leveraging data automatically collected from internal and external sources, followed by the application of credit scoring models.
The process consists of 3 steps:
Checking whether the borrower meets the minimum requirements or hard-cuts;
Analysis of the project;
Granting the loan.
The outcome of the process is a credit score that ranges from A+ to C-.
Step 1: checking the hard-cuts
Every borrower has to meet some high level hard-cuts and triggers of a financial and non-financial nature. Borrowers that do not meet the requirements excluded from the credit process. Limitations are set, for instance, for certain legal forms, industries, ZIP codes, minimum time in business, legal proceedings and minimum level of turnover. Next to that companies which fail October’s automated fraud checks are filtered out.
Step 2: systematic analysis
Following the eligibility check, a set of scoring models and automatic tools developed by October are used to assess the borrower’s creditworthiness.
Instant credit scoring models: Financial X-Ray and Transactional X-Ray
October's Financial X-Ray score is a machine learning model calibrated on hundreds of thousands of financial statements from companies which have made requests on October or similar platforms. Financial X-Ray provides a measure of the affordability of a loan by the company, which translates into a predicted probability of default (PD), and assigns a risk class accordingly (A to E). The final PD is equal to the population average of that final risk class.
The Financial X-Ray score includes:
Financial ratios such as the Fixed Charged Cover Ratio or Debt/EBITDA
Absolute financial performance measures like turnover or cash available
Qualitative elements such as sector and geographical locations.
These components have been carefully selected by October's risk team to avoid the traditional pitfalls of risk models like overfitting, and backtested on historical portfolio.
Financial X-Ray is applied as a first filter to all loan requests and constitutes a hard cut for companies assigned to the lowest risk classes (4 and 5). For loans with max size EUR 500k, it is used as the only scoring model. The Financial X-Ray risk class translates to a credit score as follows:
October's Transactional X-Ray score is a model calibrated on tens of thousands of bank statements from companies which have made requests on October or similar platforms. It includes cash stress detection features, anomalous transactions signals and affordability measures.
The features have been carefully selected by October's risk team to avoid the traditional pitfalls of risk models like overfitting, and backtested. Because this score is focused on the latest bank statements available, it offers an up-to-date view of the company, and is particularly apt to predict its financial health over the following 12 (twelve) months.
Currently, Transactional X-Ray is only applied to Instant loans in France and Italy with max loan size EUR 50k. All projects analysed by Transactional X-Ray are classified as C-.
October’s non-instant scoring model
For loans larger than €500.000, a rating based on financial and qualitative information is used to finalize the credit assessment and to assign a final score to the project.
The analysis is carried out with October’s “Credit Template” and additional information requested from the potential borrower in particular the following elements (non-exhaustive list and linked to the deal size/complexity):
Amount of financing and tenor
Presentation of the activity of the potential borrower
Description of the project
Last 3 financial statements with their appendices (if available) certified and forecasts
Ability to repay
Contractual schedules of existing financing
Other relevant documents allowing us to proceed with effective checks in matters of anti-money laundering and combating the financing of terrorism.
Overall, the level of manual due diligence applied to each request depends on its size, and on the quality/extent of guarantees available, if any.
An internal rating assigned to each potential borrower allows October to determine the eligibility of this borrowers and determine applicable credit terms. All financing requests eventually obtain a score between 0 and 100, which is an indicator of the company's risk assessment.
The score is calculated based on the 3 weighted criteria illustrated below:
Financial performance (60% weight): among which level of profitability, pro forma financial structure and cash flows projections, level of indebtedness, company's ability to repay the requested financing;
Company’s market trends and positioning (20% weight): among which sector, suppliers, customers, product offer;
Key extra-financial factors (20% weight): among which quality of the management team, governance, track record, reporting.
The score is translated into the following rating:
a score from 0 up until 24 is disqualifying;
a score from 25 up until 49 gives a score of C;
a score from 50 up until 60 gives a score of B ;
a score from 61 up until 74 gives a score of B+;
a score from 75 up until 89 gives score of A; and
a score between 91 and 100 gives a score of A+
Anti-Money Laundering and Compliance as well as potential conflicts of interests checks are carried out leveraging automated tools developed in-house:
Manager X-Ray performs an analysis of the company governance structure
Bank X-Ray performs an analysis of company’s bank statements collected both via PSD2 connection and PDF bank extracts
Doc X-Ray performs a qualitative assessment of the documentation received (anti-fraud checks)
KYC compliance checks are also performed. Projects are to be funded only if the compliance check is complete and satisfactory.
Step 3: submission to Investment Committee
As a third and final step, the analysis and its outcome are submitted to investment committees who take the final decision.
First, the project is submitted to a general investment committee consisting of risk specialists from France and the other countries where we grant loans.
Each final decision of the committee is either:“Approval”: loan is approved and will be financed on October’s platform
“Stand-by”: additional information requested
“Refusal”: financing request is not accepted
This committee decides on both the planned investment and the structuring of the loan. Beyond the credit decision making, the committee acknowledges possible conflicts of interest and their management as well as the eligibility of the loan for financing on the platform.
Second, upon validation by the general investment committee, the project is submitted to the Selection Committee of October IFP for final decision.
Each final decision of this committee is either:
“Approval”: loan is approved and will be financed on October’s platform
“Stand-by”: additional information requested
“Refusal”: financing request is not accepted
This committee decides on the compliance of the crowdfunding platform with the applicable regulation on crowdfunding services.
Once the loan is granted, October IFP may, in certain circumstances, consider that the project owner is unlikely to fulfil its obligations to repay the loan in full (in case of an unpaid event). In this case, October IFP will reassess the value of the loan by applying a provision on the loan depending on the number months late and the type of guarantee. The value of the loan is reduced accordingly.
Following a default (or termination of the loan), the provision is set to 100% unless there is a guarantee to be triggered.
None of those reviews can impact the interest rate of the loan which is defined contractually with the Project Owner.
October IFP never facilitates an exit for a lender before the maturity date of the loan.
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