Small firms shun banks for crowdfunders

The German tech firm Arend Prozessautomation has set itself a target of 20 percent growth between now and 2022. The company — from the small town of Wittlich, which lies diagonally between Koblenz and Trier — helps industrial customers to digitize and automate their systems.

CEO Axel Haas bought the firm a few years ago and steered his team towards servicing the fourth industrial revolution — also known as Industry 4.0 — a trend toward automation and data exchange in manufacturing technologies.

To realize his ambitious goals, Haas sought a crowdfunding loan. By courting small and micro investors on the internet platform Kapilendo, he was able to raise €500,000 ($587,000) within 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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The firm could have sought a loan from its regular bank, but traditional lenders thought Arend's new high-tech offering was "not very tangible," so the firm tried to secure "some kind of venture capital."

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

Fintechs have more freedom

"The overwhelming majority of corporate loans are still being lent by traditional banks," stressed Dirk Schiereck, who researches corporate finance at Darmstadt University of Technology.

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

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

Schiereck sees three reasons for the growth in small and medium-sized companies (SMEs) turning to crowdfunding. Firstly, as a result of the financial crisis, the trust between many firms and their corporate lenders has been weakened. Secondly, fintechs are quick and unbureaucratic. Thirdly, there are lots of investors searching for higher interest rates for their savings than those offered by time deposit accounts.

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Although banks do have an interest in granting loans — the European Central Bank now levies penalty interest to prevent the financial sector hoarding cash — they have become more heavily regulated over the past decade.

"That's why they are no longer keen on some types of lending, for example, working capital loans," Schiereck told DW.

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

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

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

Link between old and new economy

The fintechs have more freedom because they only mediate the loans, although some investments are partly funded by banks and partly by the crowd, which allows the traditional lender to use the crowd-raised funds as a kind of security.

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The study's authors call this "a symbiosis between the old and new economy," which allows everyone from those with just €100 or €250 to loan, to institutional investors — such as insurance companies and pension funds — to participate.

Arend is paying 8 percent interest to its lenders over four years. If the firm's revenues reach a certain level, a bonus of up to 20 percent will be added.

"It's certainly more expensive than the traditional bank, but 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 it's not his first experience of crowdfunding, Hass may well do it again.

Depending on the firm's credit rating, interest rates for Fintechs can vary between 3 and 16 percent — significantly higher than a regular corporate loan.

"The main target group is medium-sized companies with a good credit rating, but with already existing default risk," said Schiereck.

It's true that loans have occasionally been defaulted on, in which case, investors could lose their entire stake. Overall, however, the average creditworthiness of borrowers is improving over time.