Credit Assessment Process

funding gap emerging markets

Risk Management Framework

Lendahand works with direct investment and indirect investments, which can be considered as two
risk categories. We consider it a direct investment if investors can directly invest in a local
entrepreneur. We consider it an indirect investment if investors provide a loan to a local partner, for example a Micro Finance Institution (MFI). With the loan, the MFI can provide financing to local entrepreneurs.

Investing through a local partner, limits the risks. Local partners maintain financial reserves to cover loan defaults as well as shifts in currency exchange rates. Investments made directly with an entrepreneur come with their own set of risks. More specifically, loan defaults are not covered as they would be with an established local partner. As the risk associated with this type of investment is higher, so is the interest return rate.

Credit Assessment

Before an investee is accepted on the platform, Lendahand will run an extensive due diligence (DD) process. Information will be requested from the potential investee, such as financial information, the governance structure, the purpose and the impact of the funds to be raised, the credit history of the potential investee etcetera followed by interviews with the management. The investee will also go through an extensive external Know Your Customer (KYC) procedure, tests for Anti Money
Laundering (AML) and sanction lists, Politically Exposed Persons (PEP) and bad media checks. This whole process serves as a safeguard that a potential investee does not meet any of the criteria defined in the Exclusion List drafted by Lendahand, is KYC approved by an external party, and fits the portfolio from a country & sector perspective as well as from an impact point of view. A local DD visit is not a requirement prior to accepting a credit facility, but it could be part of it.

Key terms

Each credit facility (a contractual agreement with an investee regarding the size of the funding) will have unique terms which will depend on, amongst others, the risks identified during the DD process and the structure and subordination of the facility.

Decision making

The internal Impact Committee will review whether new investees meet the Lendahand impact criteria. This approval will be a condition for the investments team to bring the new partner to the external Credit Committee. Before an investee is accepted on the website the external Credit Committee will review the proposed credit facility. The Board of Directors will have a final review before granting the credit facility. Once on the platform, quarterly reporting and monitoring activities take place regarding investees, to receive updates on the performance and to act if necessary.

Credit Scoring

In the credit assessment Lendahand uses a, partly automated, credit scoring model. The credit
scoring model consists of 5 categories:

1. Management
2. Investee characteristics
3. Financial Performance 4. Funding capacity & track record
5. Macro factors

In the credit scoring model, each of these categories is made up of 4-7 questions, all of which yield a score of 1-5. Based on the weights of the (sub)scores, a total score is then obtained. This total score leads to a risk categorization of the crowdfunding offer and it is also used to determine the total interest rate of the offer. The score is dynamic in the sense that through regular reporting and monitoring scores can change and will be adjusted accordingly.

The questions relating to the scoring model consist of the following (non-exhaustive list):

- The revenue model of the investee
- The sector in which the investee operates and how competitive the investee is in this sector
- The macroeconomic environment in which the investee operates
- Currency risk
- The expertise of the management team
- How the investee is organised (governance)
- The state of internal and external controls within the company
- Whether it is a regulated company
- Solvency, liquidity and profitability. Both in the past and the projections
- To what extent the investee has been able to raise additional capital in the past
- What is the seniority of the loan as compared to other lenders and if collaterals are offered

All the subjects mentioned above are determined during the onboarding process and are part of Lendahand’s Credit Policy. The output of the credit assessment is well-documented.

Pricing

Based on the risk framework and credit scoring model and market factors, Lendahand determines the price (interest rate) of a crowdfunding offer. The interest that is ultimately applied to a project includes interest for investors (the crowd) and a management fee for Lendahand.

As direct investments are associated with a higher investment risk, so is the interest return rate. Lendahand does mention on a particular project page whether the loan is secured by the presence of collateral or guarantee agreements.

When a crowdfunding offer is accepted, a so-called Website Access Agreement will be drafted between the investee and Lendahand. In this agreement the administration and monitoring of the credit facility are mentioned, just as payment and repayment of principal amount and interest, and for example possible fees in case of a default or restructuring situation, or early repayment of the facility.