There are two types of investing available to investors on the Symbid platform. An investor may provide business financing through either a loan or an equity investment. These both entail various risks. For loan crowdfunding a risk scoring is provided for each investment opportunity. At the bottom of this page you can find an explanation for this score.
Investing in equity
1.1 Loss of invested capital
Most start-ups fail, and so when investing in the equity of a start-up it is significantly more likely that you will lose your invested capital rather than earn it back or make a profit. Therefore it is recommended that you do not invest more than you can afford without having to lower your standard of living. We strongly discourage you to invest with borrowed money.
1.2. Illiquidity of equity investments
Equity investments on our platform should be regarded as highly illiquid. There is no market for selling the shares of a private business. This means that it is unlikely you will be able to sell your shares until the business is sold or enters the public market. Even if you invest in a business that is eventually successful, it is very unlikely that a sale or IPO will take place within a few years of your investment.
1.3. Rarity of dividends
Start-ups rarely pay dividends. This means that it is unlikely you will earn back your invested capital through a dividend or other form of capital distribution regardless of the business’ success. Any profits are likely to be made through selling your shares in the business. Even if you invest in a business that is eventually successful, it is very unlikely that you will be able to make a significant profit by selling your shares within a few years of your investment.
Every equity investment made through our platform may be diluted. This means that if the business receives further investment at some point in the future it will sell additional shares to its new investors. If this occurs, the percentage of shares you own in the business will decrease. Furthermore, the newly issued shares would most likely have a greater right to dividends or include other entitlements which might work in your disadvantage. Your investment may also be diluted by the issue of share options to employees, suppliers or other parties associated with the with the business.
Investing in loans
2.1 Loss of loaned capital
Loans provided to small businesses entail certain risks. There is a real risk you will lose the loaned capital. Therefore it is recommended that you do not invest more than you can afford without having to lower your standard of living. We strongly discourage you to invest with borrowed money.
Investing in start-ups and small businesses should only be done as part of a diversified investment portfolio. This means you should invest relatively small amounts in several businesses, as opposed to a large amount in one. Furthermore, we recommend that you invest a relatively small proportion of your assets in start-ups and small businesses, and invest the majority of your assets in safer and more liquid investment opportunities.
All investment opportunities relating to Loan Crowdfunding by Symbid include a credit report by Creditsafe Netherlands, part of the Creditsafe Group. Creditsafe serves more than 70,000 clients worldwide and is the world’s leading provider of online business credit information. Creditsafe was founded in 1997 and is now headquartered in Cardiff, UK.
Creditsafe calculates the credit scores of businesses through statistical analyses of the entire Dutch business sector over a certain period. By assessing the characteristics of poorly performing businesses, Creditsafe can successfully predict which businesses are most likely to fail at some point in the future. Factors affecting the credit score include:
- Bankruptcy details.
- Legal entity used by the business.
- Date of incorporation.
- Head office indicators.
- Number of employees.
- Number of subsidiaries.
- Value of parent company.
- Value of subsidiaries.
- Business location.
- Importer / exporter.
- Business activity details.
- Previous ratio.
- Current liabilities.
- Shareholder activity.
- Capital issued.
- Cash and cash equivalents / current liabilities.
Based on this information, an algorithm determines the credit scoring of a business on a scale of 0 to 100:
74 - 100 Very good creditworthiness.
59 - 73 Good creditworthiness.
37 - 58 Creditworthy
27 - 36 Secured credit facility
0 - 26 Preferably do not provide credit
Loan crowdfunding investment opportunities on the Symbid platform include an automated credit scoring and pricing generated by INRISC, a service developed by Catena Investments, an investment management platform with a focus on FinTech.
To determine the interest on a loan, INRISC uses criteria common within the financial world. There are three distinct risk profiles: that of the borrower, the credit and the credit structure. Using these conventional risk profiles, INRISC determines an appropriate risk-based pricing.
INRISC uses its own scoring model based entirely on the financial data of a business in order to determine the risk profile of the borrower. This includes data such as operating results, capital structure, liquidity and ability to meet interest and repayment obligations. The score reflects the financial strength of the borrower, indicated on a scale of 1 to 10, with higher scores meaning lower risk. A score of 1 indicates that the borrower has already defaulted on their repayment obligations. A score of 6- indicates that the risk profile is slightly better than average. A score of 10 occurs only in exceptional cases and is unattainable for conventional businesses. This score should always be considered alongside more qualitative aspects. In other words, it is the task of every investor to make a personal judgement of an entrepreneur and the investment opportunity.
The risk profile is reflected in the duration of the loan and the form of the repayments. The longer the loan, the higher the risk. Note that the form of repayments can reduce the risk profile of the loan. Basically, the more repayments and the sooner these repayments occur, the lower the risk profile.
The structure of the credit facility is also important in determining the overall risk: in particular, the type of collateral offered and its value (in comparison to the size of the credit). Collateral can reduce the risk of a loan. Typically, however, bank financing (and financing provided by other lenders) is based on pledged collateral which implies the risk of either implicit or explicit subordination for new lenders.
In essence, all financiers make their own risk estimates based on these common criteria. The perception of risk may vary among financiers, and some prioritise certain criteria over others. The risk profiling of INRISC is strongly linked to ongoing analyses of bond markets and bank lending.
A credit margin is determined based on the final credit risk profile – a specific combination of credit risk, credit facility and credit structure. The higher the risk, the higher the price (interest rate), and vice versa.
As an investor it is important to spread risk. The risk score corresponds to the statistical probability of the borrower defaulting on their repayments, which is based on a large database. Typically, an investor will only have a limited number of borrowers in their investment portfolio, i.e. a number far below the number of borrowing parties in the statistical database. Although the probability of default for a particular borrower may be small, the potential loss for an individual investor may be much higher than the average expected if that particular borrower forms a large part of their entire investment portfolio. In the event of a default, the loss (for the investor) depends on how many repayments have been made up to that point and the overall loan structure. Spreading investment over several borrowers, several loan durations and several credit profiles is important. After all, it may well be that a borrower with a (very) high risk profile and a correspondingly high interest rate meets all its repayment obligations until the end of the loan duration.