The credit score is a representation of the creditworthiness of a company or financial institution on a scale from A to E. The score serves as an indicator of the likelihood that the borrower will repay their debts. It helps you, as an investor, to understand and weigh the risks before investing your money. A score of "A" implies a relatively low risk, whereas a score of "E" implies a high risk. Lendahand only offers loans with a credit score of A or B.
The score is calculated based on the credit history, financial indicators, and business performance. This is part of an extensive due diligence and loan applicant approval process.
Credit Scoring Model
We use a partly automated credit scoring model in our credit assessment. The credit scoring model consists of 5 categories:
- Characteristics of the borrower
- Financial performance
- Financial capacity and performance history
- Macro factors
In the credit scoring model, each category is assessed based on a series of questions, each with a score from 1 to 5. The individual scores are weighted and summed to calculate a total score. This total score determines the project's risk level, which is displayed as the credit score (A to E), and influences the interest rate offered. The score may change over time as we regularly review it. If necessary, we adjust the score.
Below are some example questions related to the credit scoring model:
- The revenue model of the borrower;
- The sector in which the borrower is active and how competitive the borrower is in this sector;
- The macroeconomic environment in which the borrower operates;
- Currency risk;
- The expertise of the management team;
- How the borrower's business is organized (governance);
- The state of internal and external controls within the company;
- Whether it is a regulated company or not;
- Solvency, liquidity, and profitability, both past and forecasted;
- The extent to which the borrower has been able to raise additional capital in the past;
- The seniority of the loan compared to other lenders and whether collateral is provided.
All the above topics are determined during the introduction process and are part of Lendahand's credit policy. The output of the credit assessment is well documented.
Lendahand determines the interest rate for a crowdfunding project based on risk, the credit scoring model, and market factors. The interest applied to a project includes the interest of the investors (the 'crowd') and a management fee for Lendahand.
The interest rate is higher for a direct investment in a business with higher risk. The project page indicates whether the loan is possibly covered by collateral or guarantees.
When a crowdfunding project is accepted, we draw up a so-called 'Website Access Agreement’ between the borrower and Lendahand. This outlines how the loan is managed, how the payments and repayments work, and what happens in case of issues, such as payment arrears or restructuring.