The ordinance of 1 May and the decrees of 1 October 2017 have clarified the legal framework for the financing of businesses by individuals via dedicated internet platforms. In all over the world, the crowdfunding activity is nascent and in full swing, around 150 million Euros were raised in France in the first half of 2015 through this short funding channel.
Crowdfunding- The Statutes of the Financing Platforms
Corporate finance platforms adopt one of two statutes created in 2017:
- The crowdfunding intermediary (IFP) carries out loan operations;
- Participatory Investment Advice (CIP) serves as an intermediary for issues of common shares and fixed rate bonds to the exclusion of any other security.
These two statutes require registration with the organization for the register of intermediaries of insurance, banking and finance (ORIAS). In this article, we are only interested in the activity of loan by the crowd.
Several Factors Explain the Development of the Activity:
- Investors are facing a drastic drop in their investment returns with zero or even slightly negative money market rates. Through a participatory platform, they can lend at a rate of between 5% and 12% depending on the risk rating of the borrower allocated by the platform and the duration of the loan.
- “Start-ups” often face funding refusals from banks because the company is too recent or the bank has trouble identifying a very innovative activity. Thus, many projects do not succeed because of lack of funding.
- In addition, prudential standards (Basel II, Basel III) limit the lending capacity of banks.
The main Features of Crowdfunding are:
- A short financing circuit. Most lending platforms agree to allow the project to be registered on their site within a short period of a few days, shorter than the bank response time. However, the borrower must then convince the crowd of individuals, usually a period of 30 days left to raise the funds.
- Platforms generally accept to act as an intermediary only for the financing of “projects”, of various sizes and not for the current cash of the company. The notion of project is not limited to the purchase of fixed assets. For example: the hiring of sales people and technicians to ensure the development of an international service company
- Companies borrow without having to guarantee either the company (collateral, mortgages, guarantor of the parent company) or the personal wealth management (personal surety) which is for the head of a sole proprietorship, a significant advantage ;
- Individuals lending to a company via a platform must realize that if they benefit from an attractive rate, they directly take the risk of credit. The platform is required to report this risk very clearly;
- Even if some platforms execute stimulus on behalf of the lenders in the event of an unpaid term, the risk of capital loss remains.
- The individual takes a credit risk only on the borrower and not on the platform because the funds lent and reimbursed pass exclusively through a payment service provider;
- When the amount requested by the borrower is not fully subscribed, the platform usually pays the lenders. She believes that if the company fails to obtain all the necessary funds, it will not be able to carry out the project described on the site. Conversely, when the funding request is oversubscribed, the majority of sites pay only the amount originally requested.
The Regulations Provide for Safeguards:
- An individual can not lend more than € 1,000 per project for a loan with interest and € 4,000 per loan without interest, which avoids taking a disproportionate risk on a project for which he is enthusiastic. However, it is not limited in the number of projects it wishes to lend. This limit does not apply to capital investments;
- The duration of the credit cannot exceed 7 years;
- An enterprise cannot raise up to one million Euros, whether in borrowing or capital;
- Some platforms bypass the threshold of € 1,000 per project and per lender using the legal framework of the cash register which is not limited in amount. This possibility is likely to be removed by order by May 2016.
What are the Loan Platforms and how do they work?
In this nascent and growing activity, there are now 80 financing platforms in France (grants, loans and capital investments), among the best known in the lending activities: Lendopolis, Lendosphère, Lendix, Unilend, Credit En, Union loan, Prexem.
Their turnover consists of a commission, of the order of 4 to 8% taken from the funds raised, at the expense of the borrower; no commission is levied on the lenders. The platforms must combine a sufficient volume of business to cover their costs of structure and a necessary selectivity in the choice of their files to avoid too many failures. Their operating expenses are divided between the development and maintenance of the internet platform, the rating and selection process of the projects to be financed, and the marketing and sales function.
In order to stand out from their competitors, the platforms are very creative: various partnerships with credit institutions and institutions to enhance their credibility, partial guarantee mechanisms for the benefit of the borrower or lender, highlighting their value. Risk analysis expertise,
For example, here is a summary of the Lendopolis fundraising process.
- The company sends its last two accounting documents, its K bus extract and a description of its project. The company’s accountant certifies the information provided. The credit analysis team delivers (or not) then a first validation;
- The company then provides a more detailed description of its project accompanied by a business plan. This business plan is validated by its accountant, at least in its computational aspects. A partnership has been created between this platform and the order of chartered accountants;
- Within 5 business days, the credit analysis team provides a credit score. The borrowing rate results from both this credit rating and the loan term.
- In case of agreement, the project is posted on the website and the fundraising campaign begins for a period of 30 days. If at the end of this period, the totality of the requested amount is not raised, the funds are returned immediately to the investors;
- The loan is reimbursed in monthly installments;
The example of the Lendix platform
The Lendix Loan Platform has found two original solutions to reassure both borrowers and investors:
- The managers undertake to lend on a personal basis to all projects selected by the platform under the same conditions as those offered to investors, which aims to reassure them on the quality of the selected projects;
- Credit institutions, linked by a partnership to the platform, undertake to systematically supplement the subscription of individuals when this is lower than the amount requested by the borrower, which is a kind of guarantee of good end. Sometimes the platform reports that only a percentage of the fundraising is reserved for retail investors.
The Example of the Prexem platform
The Prexem platform displays for each project a risk analysis commentary justifying the credit rating granted. It has put in place a protection fund mechanism to limit the risk of capital loss for lenders. For each request for funding, the site displays the amount of the protection fund granted, this amount remains the same as the repayments, the percentage of the loan covered by this fund increases gradually with the reimbursements made and ends up covering the all outstanding capital. The fund consists of a deduction of 0.5% on all new financing, in bank on an escrow account.
The crowdfunding activity is still too recent to spot the best performing business models. Performance indicators will probably emerge to assess the performance of each site: number and percentage of files retained by the platform, amounts raised, amounts and loss ratio.