How does your proposed innovation leverage public intervention in catalyzing private SME finance?
SME are more and more the target of public programs to finance qualification, training, innovation, internationalization and so on. Normally these programs offer funding in the form of co-financing, which means that SME’s need to contribute with a part of the investment. This is sometimes a deterrent from applying even to such co-financing programs and other times it is a reason for the projects failing to obtain funding.
Our micro-investment tool will allow SME to gather additional financial resources (namely private funding), which may count as co-financing for the aforementioned programs.
Moreover, if SME’s manage to obtain more private funding than that required by the public programs or subsidies, this means less expense per project for public authorities and thus more projects than can be funded.
Therefore, we are not only contributing to more a more efficient public financing of SME investment but we are also enhancing the impact of public intervention in catalyzing SME finance, by providing opportunities to more SME to participate in public funding programs.
What barriers does your proposed solution address?
Asymmetry of information, Lack of collateral, Unavailability of financial products tailored to SME needs, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs.
If you checked any of these barriers, describe how your solution addresses them
Throughout the past years, several factors have been acting as to increase the power that clients have on the financial market: the surge of new communication channels, the proliferation of a myriad of information sources, the highly diverse offer of financial services on the market and recent changes in banking regulation. All these have contributed to decrease the asymmetry of information on the market, but even so consumers of financial services are still dependent on traditional financial institutions, which hold privileged information. We tackle this by bringing together the investor and the ultimate beneficiary of the loan (the SME or micro firm) on a platform that is actually a novel forma of market. The investor can thus “see” the destination of his loan, ask for more information, follow-up etc. The debtor knows where the money has come from and benefits from a transparent system of tariffs for getting the loan.
By their nature, dimension and structure, banks are forces to apply rigid criteria to evaluating credit requests, which include the provision of collateral. SME often find themselves in the impossibility of providing the collateral needed. We tackle this first by resorting to community guarantees (an investor may set his interest as guarantee for the project in which he invests, to defend the project’s trustworthiness and potential) and second by financing only investment in assets that may be offered as collateral, therefore erasing the need for the company to provide other collateral than the investment per se.
Our micro-investment platform in designed to finance specifically SME projects in need of funding. The loans they obtained must respect the conditions that the entrepreneur states, since he may communicate them directly to the investors, by defining the terms of the auction. This not only insures that the final bid is in agreement with both the conditions of the firm and of the investor but also addresses some other issues:
As the financial transaction occurs through an online platform, between the investor and the entrepreneur, transaction costs are significantly lowered, compared to the tradition financial intermediary case.
Financial institutions, due to their size and functioning, are more efficient when financing higher value loans to large firms, as they are both more lucrative and with a lower perceived risk. We create incentives for SME funding: distributing risk (investment in any 1 project is limited to a third of the total value, but not higher than 4.500 Euro), providing the option of alternative guarantees (like the community guarantee), contributing to the development of the local community (of which they are probably part), enhancing social change (and being able to track it step by step as they know exactly which project they are funding).