The third round of the Croatian National Bank’s survey on the financing conditions for small and medium-sized enterprises has shown a disappointing continuation of a practice we thought had been swept away by Linić’s Law on Payment and Defining Deadlines for Settling Obligations. Specifically, the survey revealed that companies generally avoid bank loans (only 31 percent of small and medium-sized enterprises use them, as most find the bureaucracy surrounding loans too complicated). And the others? Besides some having enough of their own funds, a large portion of entrepreneurs uses payment deferrals (to suppliers, employees) as a lever for financing working capital! As many as 51 percent defer payments for up to 60 days, and 19 percent are late with payments for more than 60 days.
The problem is that domestic companies are undercapitalized, and the reserves they had have been consumed by the crises of the pandemic and war. We all know that there is a surplus of about 70 billion kuna in banks daily, and by the end of the year, due to entry into the eurozone and the release of mandatory reserves and minimally required foreign currency claims, there will be even more.
However, the mantra in banks remains ‘there are not enough good projects,’ so companies should be more actively seeking alternatives. One of them is ‘peer to peer‘ financing, specifically a P2P platform for mutual financing of companies. It has been present in Croatia for more than a year and a half, and so far, more than 18 million kuna of working capital has been channeled to Croatian small and medium-sized enterprises through the P2P platform for mutual/direct (peer to peer) financing. Currently, the total amount of funds available for financing working capital through the P2P platform, according to predefined investor criteria, is around 8 million kuna and changes daily.
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—– The P2P platform is intended for all entrepreneurs, investors, or buyers of receivables, who due to the nature of their business have excess cash or whose business is seasonal, so they want and can short-term invest cash with low risk and thus at least partially protect themselves from inflation. These are companies looking to invest in a new asset class, which has so far been reserved exclusively for banks and traditional financial institutions. It involves investments in an asset class that is not affected by daily volatility of stock markets.
Most often, these are so-called ‘passive investors’ who do not need to constantly manage their investments but are willing to let an algorithm do it for them, according to predefined criteria. Namely, when investing on the P2P platform, the returns on invested funds are fixed and known in advance for the entire financing period – annual net returns range from 5 to 11 percent while interest rates on bank deposits are still at historically low levels – explains Sašo Breitenberger, director of the platform.
Eighteen million kuna is not a small amount; there are clearly quite a few interested users, but neither investors nor recipients of financing are willing to go public. One anonymous user says that he urgently needed around a hundred thousand kuna for the procurement of raw materials that he unexpectedly managed to acquire under wartime procurement conditions and thus fill his warehouse. The banking procedure for such a small amount was complicated, so he turned to the P2P platform.
– I thought that such an amount for this source of financing would be too large. It turned out not only that it wasn’t, but we managed to obtain capital in record time and catch the raw material at the price and quantity we needed – our entrepreneur briefly states.
Who are the investors on the P2P platform?
Public corporations, professional investors, private companies of various profiles, institutional investors such as insurance companies, and funds.
– P2P Finance, with the aim of protecting investors, implements a series of risk management measures, and in cooperation with Dun&Bradstreet, a leading provider of business information in the region, has developed an advanced risk management system that enables automated assessment and monitoring of credit risks in real-time. Each investor on the P2P platform sets their investment policy, minimum credit rating of financed receivables, required discounts/returns, portfolio diversification rate, maximum maturity, and the type of product they wish to invest in.
The risk of investing on the P2P platform is lower because each receivable is divided into smaller parts, fractions, and the investor is never the owner of the entire receivable but according to how much they have determined their maximum allowable exposure of their portfolio to each individual debtor. Uninvested funds of the investor are held in a special purpose account exempt from enforcement by P2P Finance, and the investor has the option to change their investment preferences at any time, stop trading, and request a payout or increase their portfolio by investing additional funds into the trading account.
All transactions, except those made without recourse rights on the seller of receivables, are secured by security instruments, at least promissory notes and blank bills of exchange from the seller of receivables, sometimes even from the ultimate debtors. P2P Finance takes maximum care of the portfolio, the collection of due receivables, manages security instruments, and conducts judicial and extrajudicial proceedings in case of possible delays on behalf of the investors. Due to such quality credit risk management, more than 200 realized various transactions on the P2P platform have been successfully collected without significant delays – explains Breitenberger.
The P2P platform is available 24 hours a day, seven days a week, with no account opening and maintenance fees and unnecessary administration. It is fully compliant with legislation regulating the prevention of money laundering and financing of terrorism, protection of personal data, assignment of receivables, loans, and online trading.
Who are the users and what amounts of financing are most common?
Breitenberger specifies that the sellers of receivables (recipients of financing) are companies that need additional liquidity to finance their operations. These are companies with existing or future claims from quality domestic or foreign customers, coming from the micro, small, and medium-sized enterprise segment. Members of the P2P platform can also be craftsmen and freelancers – provided they are obliged to submit annual financial reports!
Additionally, these are companies that do not have the time or resources for bureaucratically complicated and time-consuming bank financing and do not want to be long-term tied to contracts with banks and other financial institutions but want simple and fast financial solutions tailored to their needs.
– In today’s times of disruptions in supply chains, daily volatility of raw material and energy prices, quality cash flow management is extremely important. With our P2P platform, such companies can obtain additional liquidity in a very simple and fast way, which is essential for ongoing operations. Each receivable entered into the trading system on the P2P platform is assessed with a credit rating calculated based on data about the debtor of the receivables and the seller of the receivables.
According to the credit rating, a limit is determined up to which the entrepreneur can be financed. Given that the users of financing on the P2P platform are small and medium-sized enterprises, the individual amount of financing receivables has not exceeded 500 thousand kuna so far, but that does not mean that if a company with acceptable larger receivables were to apply, they could not be sold through our P2P platform – concludes Breitenberger.
There is no doubt that peer to peer is the future of financing, especially in times of rising interest rates, complicated procedures, but also the specifics of capital markets that not all small and medium-sized enterprises can access (for example, crowdfunding or Funderbeam platforms target innovators with potential for the global market). P2P Finance is owned by a Slovenian company where it has been operating since 2016. To date, they have channeled as much as 407 million euros of liquid funds.
