Crowdlending – financing SME credit via crowdfunding is growing in Switzerland. Andreas Dietrich, editor of the Swiss Crowdfunding Monitor, explains why there are more lenders than borrowers and why the banks don’t need to worry about this.
Magazine dialogue: You published the 2015 edition of the Crowdfunding Monitor a few days ago. Have you noticed any changes compared with the previous years?
Andreas Dietrich: The market has grown again in line with our predictions. We’re now seeing a volume of around 27.5 million francs.
That isn’t really that spectacular.
The market is in its infancy but is growing strongly in some areas. There was just one project for crowdinvesting for real estate last year, this year we’ve already got a volume of around 7 million francs. Crowdlending in the SME sector is also booming.
Crowdlending – i.e. a crowdsourced loan for a company – has also grown rapidly. What potential could this have in Switzerland?
I think we could be talking hundreds of millions here.
That isn’t really that amazing compared to the USA or the UK.
True, but then they have completely different financial systems. The relationship with a principal bank like we have is not something you see often in the USA or the UK. There even small companies go straight to the capital market.
Companies are more familiar with the system than they are here?
Exactly. There are very few countries in the world in which the probability of getting a loan from the bank as a SME are greater than here in Switzerland.
Not really, it’s more that the companies are financially sound and the default risk for the banks is therefore pretty small.
So let’s get more specific here. I’ve got a company, I need money for new infrastructure and don’t want to go to a bank. What do I have to do to get money with crowdlending?
You’d have to apply to one of the four platforms that offer SME credit in Switzerland. The usual documents such as a company report and financial key figures are enough for this and then you have to explain what you need the money for. Your details are checked by the platform and if everything’s OK, the project is approved. The call for funding process differs from platform to platform.
Certain platforms have credit ratings like a bank – the poorer the rating, the higher the interest. The other way is the way that Cashare do it: This is also with a rating and a suggested interest rate. But in this case the lenders can make offers for the loan. That means they can offer lower interest rates.
This market works despite the small volume involved?
The market works extremely well, at least it does in the auction process. There are considerably more investors than there are borrowers here.
The figures speak for themselves. We had a default risk or around one or two percent with this type of loan in the last six years. At the same time they yielded interest of around six percent. Where else do you get that? It’s a very interesting sector for investors.
What advantages do borrowers have compared to a bank loan? Interest and clarifications should be about the same.
There are people who don’t want a loan from a bank out of principle. And of course they are hoping for a lower interest rate. And then you have to remember that banks aren’t particularly interested in loans up to 200,000 francs because the costs are comparatively high and it’s not profitable.
Andreas Dietrich talking to author Hansjörg Honegger.
Is there an optimum amount for a crowdlending loan?
Up to 200,000 francs is realistic. Due to the “20” rule, a loan of over a million is more or less impossible. In addition to that, the banks are very competitive when it comes to a loan of that size. I think an interesting possibility would be much bigger loans, say 15 million. The bank could take the lead here and pay out 10 million and gather the rest together via a crowdlending platform.
Do such types of financing already happen in Switzerland.
No, it’s a project in the pipeline.
Let’s go back to the “20” rule that you were talking about. Could you just explain that for us briefly?
The 20 rule is in the bank ordinance. If somebody takes money from more than 20 people then he is acting like a bank and therefore has to be treated as such. Not a bad rule in itself but one that completely contradicts the idea of crowdfunding.
This rule applies for investing and lending?
No, it doesn’t apply for investing. The rule doesn’t apply uniformly. In terms of crowdlending it’s a barrier to new business models. When it comes to crowdinvesting, I think there are too few regulations.
What do the law-makers have to do so that crowdfunding continues to grow in Switzerland?
The 20 rule has to be dropped for crowdlending. But I doubt whether crowdfunding could really take off in Switzerland simply due to better regulation.
Despite all of the cultural reservations, does crowdfunding have the potential to cause problems for the banks in the long term?
The potential is great and could be highly disruptive. You have the possibility of bypassing the banks to get a loan. But I personally think that it will simply supplement what’s already on offer.
Crowdlending platforms in Switzerland
Here you can download the current crowdfunding monitoring study free of charge here:
Fees only charged in the event of success: 0.75% p.a. per party; with min. fee for borrowers of CHF 50 for private persons and CHF 300 for SME.
0.8 – 3% for borrowers, 1% for investors
Depending on the credit amount (between 0.45% – 1.50%) however at least CHF 1,000
Borrowers: 0.75% upfront, investors: 0.65% of the investment amount
Fee-based loan facilitators combined with support services for both parties
1 – 7% Zins
Andreas Dietrich studied economics at the University of St. Gallen from 1996 to 2001 and qualified as a business studies teacher at the University of Zurich in 2008. At the same time he wrote his doctoral thesis at the HSG on banking and corporate finance. Since 2008 he has been a lecturer and project manager at the economics department of the University of Lucerne and at the Institute for Financial Services in Zug. He joined the Board of Directors at the Lucerne Cantonal Bank in May 2015.
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