The October credit score
1 February 2019
By now you probably know that every project on October is scored on a scale from A+ to C. Projects with an A+ score involve a lower risk than projects with a C score. But, what is this worth if you don’t know what we base it on? We asked Bob, from our credit team in Amsterdam to give some insights on the scoring process.
Step 1: the eligibility test
The process starts with the potential borrower, who does the eligibility test on our website. The test provides insight in the borrower and gathers some external background data. It allows us to automatically make a selection based on turnover, profitability and time of existence and give a preliminary indication of the loan within a few minutes.
Step 2: first analysis and meeting
If the borrower gets through the eligibility test, we ask them to send us all relevant files, such as financial statements, investment memorandums and bank statements. Our system automatically selects the relevant data from these files and fills them in our scoring model that allows for a solid credit analysis.
The scoring model is filled with information about the loan, a reflection and a projection of the revenues, management fees and so on. This adds up to a total of 70 financial indicators, such as cash position, debt, accounts receivable, etc., that go back 3 years in time and 1 year into the future. This way, the scoring model shows the development of these financial indicators and gives insight in the financial performance. The financial performance of the borrower makes up for 60% of the credit score.
We always interview the borrower to ask any remaining questions. The interview serves another purpose as well: we do an assessment of the management qualities and relevant experience of the entrepreneur. 20% of the credit score is based on the management qualities of the borrower and its team.
Furthermore, we review the market outlook of the borrower and distinguish if the market is growing, stable or shrinking. Obviously, when the market outlook is negative, it also has a negative effect on the score. We also review what the position of the borrower is in the market and look at it’s marketshare. 20% of the credit score is dependent on the market and the borrower’s position in the market.
This scoring model is then combined with information from our huge database with all our past loans. Together with the non-financial elements, the team and the market outlook, it makes up the credit score.
Step 3: the credit score
The scoring model determines if a project is doable or not. If a project is not doable, the project will be denied and it will not be presented to the lenders. If a project is doable, our scoring model shows immediately what the credit score of this project will be. The credit score ranges from 0 to a 100 points. To make the score more easily readable, we convert this score to the categories you know: A+ to C. The interest rate, is determined by the number of points attained and the duration of loan. That is why interest rates within a credit score category can differ sometimes.
Step 4: the credit committee
We will then present the project to the October Credit Committee, where a minimum of 3 international Credit Directors have to approve the loan. When they give their go-ahead, the borrower will be presented an offer. When the borrower accepts the offer, the project will be presented to the lenders.
Step 5: fraud prevention
Of course, we also want to prevent fraud. We don’t assume that everyone is a super-villain, but not everyone has good intentions either. To prevent fraud we cross-reference the information that we have available from the borrower with external databases. Also, we compare financial flows and data from the financial account with each other, to see if they align. Furthermore, we check who are the main customers and suppliers of the borrower and check whether the amount requested makes sense in light of the purpose of the loan. The final stage includes a background check on the entrepreneur and a check of the company’s statutes.
And that’s it! Our process from start to end. It is substantial process that gathers a lot of information from a lot of different sources. You are always encouraged to read the project description and review the financial statements yourself as well. The financial ratiosthat we provide should help you in your review. With the 48 hour preview of projects you have time to discover the borrowers you will support!« go back to posts list