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Why companies need a State Guaranteed loan

Recently we had 2 major announcements here at October: the first is that October is able to distribute State-guaranteed loans in France; the second is that we now use Magpie, an automatic loan eligibility assessment model built on machine learning algorithms, to analyse and select loan requests up to €250.000 that can benefit from a State guarantee.

What are State Guaranteed loans?

As the Covid-19 crisis increased the economic uncertainty, investors in general are less willing to provide credit. But now more than ever SMEs need credit, sometimes for their growth, more often to maintain their activity while their income is (temporarily) dropping.

In order to ensure that SMEs obtain the liquidity they need to continue their activity, governments are reducing the risk for lenders with State guarantees. State guarantees cover a part of the loss in case a loan defaults. In other words, if a company cannot repay the loan, the state will partially repay for the company. As such they make it safer for you, as a lender, to lend to an SME.

In France, the government has announced an exceptional package of 300 billion euro State-guaranteed loans to support French SMEs. With this guarantee, the French state covers up to 90% of the capital lent.

Where Instant Projects come into play

In order to increase efficiency and distribute more loans, October is digitizing its credit analysis further for projects under €250,000 and covered by a State guarantee. To do this we use Magpie, an automatic borrower loan eligibility assessment model built using machine learning algorithms on large amounts of data collected by October over the past 5 years across different countries.

Instant Projects are born from a simple assumption: the longer and more complex it is to get financed, the less time companies can work on their projects. That’s why, thanks to Magpie, eligible companies will know whether they can get an instant loan and at what costs within a matter of minutes.

So far we have published 10 Instant Projects covered by the French State guarantee. Almost 4,000 lenders have already financed an Instant project. If you have lent to one of those projects, chances are that you have noticed some differences from traditional projects.

  • The first difference is a particular repayment structure, which is due to the conditions set by the French State guarantee: during the first 11 months there is no repayment; no capital, no interest. The interest is paid in the 12th month. The borrower can also repay the capital (partially or in full) at the end of the first year. If the borrower decides not to repay the loan in full and spread the repayment of the loan over a period from 1 to 5 years, a new interest rate is applied for the following years. You can find a more detailed explanation in our dedicated tutorial.
  • The second difference is a less detailed project description: for Instant Projects we still provide general information and a company’s financial results, but we don’t provide as many details on the reason of funding as we do for standard projects, because this information is normally written by our financial analysts. Instant Projects, along with the French State guarantee, are meant to support SMEs ensuring continuity following the impact of the COVID-19 crisis on their activity. But what exactly does this mean?

Purposes of Instant Projects with French State guarantee

COVID-19 and the measures taken to reduce its spread have hit SMEs in various ways. Think of restaurants, hotels and stores that were forced to close, or manufacturers that had to reduce production to match a decrease in demand. Many SMEs have buffers to survive a brief drop in activity. Also suppliers and governments have helped SMEs survive with payment extensions and subsidies. However, due to COVID-19, a lot of SMEs experience a prolonged drop in activity and there can be several reasons why a company might need additional cash to face the current crisis. Let’s take some real examples:

1. Paying suppliers

Companies that want to ensure their continuity despite the crisis are still dependent on their suppliers. In the event of a drop in turnover, companies must resort to credit in order to secure the liquidity required to pay them and guarantee access to the resources needed for production.

2. Paying salaries

A decrease in activity and a drop in turnover also mean that a company has less liquidity to pay salaries. However, the workforce is essential to ensure the continuity of the business and the recovery from the crisis. In order to avoid resorting to drastic measures such as dismissal of employees, companies can therefore rely on a loan to secure the liquidity needed to pay salaries.

3. Paying rent and other fixed costs

Even during the crisis, companies face a number of fixed costs such as paying the rent for the facilities in which they operate. Companies may have to borrow money to ensure that they have sufficient cash to pay these fixed costs during the crisis, until a further increase in turnover will provide them with the necessary liquidity to cover these costs.

4. Taxes and contributions

Another fixed cost that companies face are taxes and contributions for their employees. Although in many countries governments have introduced measures to alleviate the tax burden on companies during the crisis, the current turnover generated by business activity may not be sufficient to meet these costs.

5. New investments

The current financial crisis is certainly having a strong impact on productivity, but this does not mean that companies cannot continue to innovate and grow even in this period. In many cases, new investments may be the most suitable response for companies that have had to change their business model or take advantage of new opportunities that can be generated even in this period because of the crisis. Where the cash availability of a company is not sufficient to ensure its growth, October represents a valid solution to take advantage of new opportunities that even at this time the market can offer.

Whatever the reason why a company needs liquidity, thanks to the Instant Project and the French State guarantee October is now able to offer a faster and more effective financing solution. As a lender, it allows you to diversify your portfolio even more and support companies when they need it most.