Credit and finance is always a big issue for channel partners. This is an industry where vendors have treated distributors as de facto banks for their resellers and dealers, where actual bank finance can be hard to come by and measures like invoice discounting have been employed by partners to try generate cashflow.
So I was intrigued by the recent Irish launch of Grid Finance, an online peer-to-peer financing platform. The company argues that “by creating an online community that finances itself through modern online financial products, the traditional idea of a community bank can be redefined and transformed to meet people’s changing financing needs”. Grid Finance’s vision is “to lead change in banking, both in Ireland and globally by building practical financial products that support and respond to people’s modern lifestyles. We want these financial products to help real people, local businesses and community organisations.”
Fine words, but how does it work? Local businesses, community organisations and individuals create projects with a specific need and value on the Grid and individuals can choose to provide funding towards that project and set out what interest rate they expect for that financing. The minimum amount people can lend is €5 and the maximum is 50% of each project. The minimum loan businesses and organisations can seek per project is €2,000 and the maximum is €75,000. The lowest interest rate that can be charged buy lenders is 0.1% and the highest is 20%.
Grid says making the finance project-based ensures that businesses are transparent about what the money will be used because it doesn’t allow “non-specific fundraising on the platform. Transparency is critical to the fundraising process – It is vital that businesses and community organisations are clear on what they are raising money for”.
Once a project’s financing target has been reached, the average interest rate is calculated and it’s up to the borrower to decide whether or not to agree to the loan at that rate. Loan terms range from a minimum of three months to a maximum of three years. As for what Grid gets for providing the service, lenders pay a monthly subscription fee of €4.99 while borrowers pay an annual subscription of €249 and 2% of any loan financing raised.
In its pilot phase, Grid Finance provided €2,000 each to two Irish SMEs in the food and beverages sector. It hasn’t received any applications from IT companies to date but says it would “be delighted to welcome IT companies seeking project finance”.
Alternatives
I asked why anyone might be interested in going to the Grid for finance, rather than the usual sources. The company replied with what it considered were a number of key advantages.
The ability to access capital quickly was top of the list: “The approval process for a project going live on the platform can be as little as 48 hours,” says CEO Derek F. Butler. “Projects will typically be live for a month, within which time the required finance is raised from a community of lenders.” He also claims the rate charged for the financing will be better than traditional sources because while lenders propose the interest rate for their individual loans, the borrower pays an average of the interest rates proposed for all the loans that go to finance the project.
As for the other reason, well that was interesting because although Grid Finance claims to be “transforming banking and financial services in Ireland by building innovative financial products for the connected generation”, it is trying to do so by rejuvenating the concept of a community bank. It believes this is an approach that sets it apart from other providers. As the company states in its brochure: “We have not found another entity/business that is fundamentally trying to redesign the traditional nature of a community bank.”
What does this mean? According to Butler, it means borrowers can “access a community of supporters that are supportive of your business and who are customers or potential customers. The concept of peer-to-peer financing is that people lend to businesses they know and trust. Lenders to small businesses tend to be customers or potential customers”. It’s a fascinating notion because, unlike your local bank, the ultimate decision over whether a project should be financed or not relies on the agreement and knowledge of local lenders rather than being reliant on a generic, automated process at head office.
It will be interesting to see how Grid Finance develops and what effect, if any, it will have in terms of providing an additional route to financing for local IT providers. The emphasis on a project-based approach could prove a challenge to some but it may also represent an opportunity in terms of being able to access a source of financing for more strategic purposes.
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