Crowdfunding is becoming the lender of choice for small businesses | Business | Economic and financial news from a German perspective | DW

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German technology company Arend Prozessautomation has set itself a growth target of 20% by 2022. The company – from the small town of Wittlich, located diagonally between Koblenz and Trier – helps industrial customers digitize and automate their systems.

CEO Axel Haas bought the company a few years ago and led his team in servicing the fourth industrial revolution – also known as Industry 4.0 – a trend towards automation and the exchange of data in manufacturing technologies.

To achieve its ambitious goals, Haas applied for a crowdfunding loan. Courting small and micro-investors on the Kapilendo internet platform, he was able to raise €500,000 ($587,000) in just four days.

“We will use the money to open two new offices and launch our new device – which collects, processes and encrypts data to optimize production,” Haas told DW.

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Axel Haas is the CEO of Arend Prozessautomation, based in Wittlich, West Germany

The company could have applied for a loan from its usual bank, but traditional lenders thought Arend’s new high-tech offering was “not very tangible”, so the company tried to get “some sort of capital risk”.

So-called fintechs like Kapilendo are relatively new to the financial services market. To assess your eligibility for a loan, they review budgets, forecasts and credit scores. But even more important for crowdfunders is a good story. High-growth digital services or an unusual product usually attract investors.

Fintechs have more freedom

“The overwhelming majority of corporate loans are still lent by traditional banks,” said Dirk Schiereck, who studies corporate finance at Darmstadt University of Technology.

But debt financing, via electronic platforms, is no longer a niche phenomenon, but a growing alternative, he added.

Everything is possible: from a working capital loan of €100,000 for six months to a single digit investment loan in the millions for three years.

Commerzbank branch

Major German banks fell out of favor with the business community following the 2007/8 financial crisis as they tightened lending conditions

Schiereck sees three reasons for the growth of small and medium-sized enterprises (SMEs) turning to crowdfunding. First, due to the financial crisis, the trust between many companies and their business lenders has been shaken. Second, fintechs are fast and unbureaucratic. Third, many investors seek higher interest rates for their savings than those offered by term accounts.

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Although banks have an incentive to lend – the European Central Bank now charges late payment interest to prevent the financial sector from hoarding cash – they have become more regulated over the past decade.

“That’s why they are no longer interested in certain types of loans, for example working capital loans,” Schiereck told DW.

Working capital loans finance the day-to-day operations of a business.

However, SMEs need these types of loans to finance seasonal goods, sudden increases in demand or other cash flow problems.

According to “Finanzmonitor 2018”, a study by the Darmstadt University of Technology on behalf of crowd platform Creditshelf, almost half of German medium-sized companies admitted that it had become more difficult to obtain financial support. money from traditional lenders over the past 12 months.

Link between the old and the new economy

Fintechs have more freedom because they only mediate lending, although some investments are partly bank-funded and partly crowd-funded, allowing the traditional lender to use funds raised by the crowd as a kind of guarantee.

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Locomore train

Crowdfunding has been used by thousands of startups to raise capital, including German rail services Locomore

The authors of the study call it “a symbiosis between the old and the new economy”, which allows everyone, from those with only €100 or €250 to lend, to institutional investors – such as companies insurance and pension funds – to participate.

Arend pays 8% interest to its lenders over four years. If the company’s income reaches a certain level, a bonus of up to 20% will be added.

“It’s definitely more expensive than traditional banking, but the liquidity works,” Haas told DW.

The platform determines the interest rate based on the risk assessment and “we can then confirm or reject it,” he added.

Although this is not his first crowdfunding experience, Hass could do it again.

Depending on the company’s credit rating, Fintech interest rates can vary between 3-16%, which is significantly higher than a regular business loan.

“The main target group are medium-sized companies with a good credit rating, but with an already existing default risk,” Schiereck said.

It is true that loans have sometimes defaulted, in which case investors could lose their entire investment. Overall, however, the average creditworthiness of borrowers is improving over time.

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