Crowdlending for small and medium-sized enterprises (SME) proved to be one of the main drivers of the growth of crowdfunding in Switzerland in the year 2017. The total volume of loans that were financed over crowdlending platforms reached CHF 186.7 million in 2017 (see Crowdlending Survey 2018). In 2018, this volume is expected to rise significantly. Though the expected growth rates are very high, the absolute volumes remain low. Loans given to SME (< 250 employees) by Swiss banks for example, amount to almost CHF 300 billion. [1]
Supply of loans in Switzerland and where the potential of crowdlending lies
From an economic perspective, crowdlending can generate benefits over two channels. On the one hand, it is possible that certain creditworthy companies are not able to receive a loan using traditional financing channels. For these companies, crowdlending would constitute an alternative option. On the other hand, one could argue that financial intermediation through crowdlending leads to lower costs (for example due to lower transaction costs). There are not yet any studies for the case of Switzerland, which examine this second argument. Concerning the first point, there are no indications suggesting the presence of a problem with credit allocation in Switzerland. According to the SME study (KMU Studie) by the IFZ and commissioned by the SECO, Switzerland shows no signs for a shortage in the financing of SME. [2]
Overall, 32 percent of all Swiss SME have a loan at a bank. Those SME without a loan usually have other lenders and/or have enough equity. The category comprising of companies that have a need for financing, but whose credit application was denied by the bank, is very small. Only five percent of Swiss SME who applied for a loan were actually declined one in the last year. The reasons therefore were often the lack of collateral or low cash flows. In this respect, only a small opportunity arises for the crowdlending market from this category. In addition, it is expected that a substantial share of these SME would not fulfil the credit criteria set by the crowdlending platforms.
More interesting for the crowdlending platforms, however, are those companies which do not submit a credit application, although they have a need for bank financing. This can be traced back to a number of different reasons. A company may, for instance, refrain from the application process because they expect their application to be declined by the bank or to receive unfavourable conditions. This group of “discouraged” SME constitutes around six percent of all Swiss SME, or a share of 27 percent of those SME in need of financing.
Companies are interested in crowdlending
So, could companies even see themselves being financed by crowdlending? At the Lucerne University of Applied Sciences and Arts, Urs Henggeler investigated exactly that question in a bachelor thesis. The survey, however, was not representative. Only 113 companies were included and the geographical distribution or distribution among sectors was not representative. As an example, two thirds of the total of 113 SME questioned are located in central Switzerland. In addition, companies from the third sector (services) are underrepresented and the second sector (industry) overrepresented in comparison. The figures are certainly to be viewed with caution. Nevertheless, some interesting conclusions can be drawn from the study:
- Crowdfunding enjoys a surprisingly high level of awareness among the questioned companies: 83 percent have heard of the term crowdfunding and 45 percent even claim to know how crowdlending works.
- Among the Swiss crowdlending platforms, Cashare and CreditGate24 are the most well-known, followed by the platforms Creditworld, Lendico and Swisspeers.[3]
- Almost half (!) of the questioned companies could, in principle, see themselves borrowing money through crowdlending. 18 percent of the questioned companies could even see themselves replacing their current financing channel with crowdlending.
- Figure 1 shows the conditions which would have to be fulfilled in order for the questioned companies to apply for a loan through crowdlending. 71 percent expect straightforward processing of their credit application (compared to other financing channels). 56 percent state better interest rates/conditions as a condition.
Figure 1: Conditions for using crowdlending platforms instead of traditional funding channels
Conclusion
Crowdlending has a large potential in Switzerland. On the one hand, there is a relatively large group of SME, which do not submit a credit application even though they have the need for financing. On the other hand, numerous companies with existing loans could see themselves applying for financing through crowdlending. Conditions therefore are, however, the comparably straightforward processing of the credit application, as well as better conditions. Furthermore, the survey, which is not representative, may show that SME assume a more open attitude towards the topic than in the past. Examining the results of the survey, one can conclude that crowdlending platforms are expected to increase their market share in the future and thereby become competitors for banks within the financing market.