Credit scoring in lending crowdfunding: evaluation criteria for business loans

A loan application must always go through the credit scoring: the evaluation of the creditworthiness of the applicant company. This applies to both a bank loan and a lending crowdfunding loan.

A lending crowdfunding platform, in fact, is not simply a technology intermediary that publishes a request and leaves the final decision to the market. Although the evaluation process may be less rigid than that of a bank, before a project is made visible to investors, there is a thorough analysis of the proposal and the proposing company.

It is important for platforms to present credible projects and trustworthy companies to investors in order to maintain a high campaign success and loan repayment rate: their reputation and, consequently, their business model depend on it.

Understand How credit scoring works in lending crowdfunding is critical for two reasons:

• allows you to present yourself appropriately to the platform;
  
• helps set a loan amount and term consistent with actual repayment capacity.

In this article, we analyze How lending crowdfunding platforms evaluate businesses, what indicators they consider and what tools they use.

The logic of selecting lending crowdfunding platforms

Lending platforms operate as regulated marketplaces, but they do not automatically publish every loan application as many do reward crowdfunding platforms.

They select enterprises because:

• must protect investors from excessive risk;
  
• Must preserve their reputation;
  
• must maintain a balance between expected return and portfolio quality.

The key element to be evaluated is the creditworthiness of the proposing company. Credit scoring is an assessment that integrates at least two dimensions:

1. Repayment capacity, that is, debt sustainability over time.
   
2. Quality of risk, i.e., the probability that the enterprise will fulfill its commitments.

In lending crowdfunding, the concept of credit scoring is applied with Banking-like logics, but with often more standardized and digitized tools.

Lending crowdfunding and bank credit: similarities and differences in evaluation

Many enterprises wonder whether the evaluation criteria for business loans from a platform are “simpler” than that of a bank.

In fact, the underlying principles are similar:

• analysis of budgets;
  
• Verification of debt exposures;
  
• Control of payment history;
  
• evaluation of cash flows.
  

The difference lies mainly in the process:

• Greater standardization;
  
• Use of proprietary scoring models;
  
• Generally faster timelines;
  
• Marked focus on consistency between amount requested and ability to repay.

Resorting to lending crowdfunding, therefore, does not bypass creditworthiness assessment. It simply becomes more streamlined and can have less rigid meshes, because it will then be up to investors to decide whether to lend money to that company with the knowledge of the level of risk and the relative interest rate offered.

The evaluation pathway: from application to loan publication

When an enterprise submits a loan application On a lending crowdfunding platform, a multi-step evaluation process is set in motion...

The evaluation combines automated analysis, external checks, and a final human intervention before the offer is published to investors.

Pre-screening: the minimum requirements to enter the selection process

The first stage is a preliminary filter. Not all enterprises can access the full evaluation process.

At this stage, the platform verifies:

• Legal form and regular registration with the Commercial Register;
  
• Minimum operational seniority;
  
• Absence of bankruptcy proceedings or significant prejudicial events;
  
• Consistency between amount requested and company size.

It must be considered that crowdfunding platforms operate in a regulated environment and are subject to identification and control requirements.

For this reason they apply procedures of:

• KYC (Know Your Customer);
  
• AML (Anti-Money Laundering).
  

This means that they have to identify:

• directors and relevant partners;
  
• beneficial owner;
  
• Any politically exposed individuals;
  
• source of funds.

Some platforms publicly state their eligibility criteria so as to avoid wasting companies' time and losing it themselves.

If the enterprise passes this first filter, it moves on to the next stage.

Document collection and preliminary analysis

This is where the real analysis of creditworthiness begins.

Platforms normally require:

• latest filed financial statements;
  
• updated accounting situation;
  
• Details of outstanding debt exposures;
  
• plan for use of funds;
  
• business plan or economic and financial projections.
  

To these are often added checks on:

• risk central;
  
• credit information;
  
• payment history;
  
• Any negative reports.

Credit information includes data on current loans and repayment history, elements that directly affect creditworthiness assessment. Some platforms also integrate bank flow analysis and behavioral indicators To estimate the probability of default.

Any inconsistencies between stated numbers and objective data emerge at this stage. It is one of the most delicate moments in the entire process.

Scoring and deliberation: algorithm, analyst, credit committee

Once the data have been collected and verified, the evaluation model comes into play.

Many platforms use proprietary credit scoring systems Which:

• Analyze economic and financial indicators;
  
• They assign a summary score;
  
• classify the enterprise into a particular risk class.

However, the process is almost never fully automated. After scoring, an analyst or credit committee intervenes who :

• Checks the overall consistency of the project;
  
• Evaluates any qualitative factors;
  
• may propose changes to the amount, term or conditions of the loan.

There are generally three possible outcomes:

1. Approval and publication of the campaign;
   
2. Request for additions or revision of conditions;
   
3. rejection of the request.

Quantitative indicators: the numbers that determine creditworthiness

When a platform evaluates a loan application, the most structured part of credit scoring involves numbers.

Creditworthiness, in fact, is based on. economic and financial indicators which allow us to estimate the probability that the company will repay principal and interest on time.

Profitability and economic stability

The first element analyzed is the Ability of the enterprise to generate margins.

Platforms normally examine:

• Turnover performance in recent years;
  
• operating margins;
  
• NET RESULT;
  
• any major fluctuations.

It is not just a matter of growth. A company with stable revenues and consistent margins may be more creditworthy than a company that is booming but has erratic results.

A key indicator is EBITDA, because it is a summary measure of the operational ability to generate resources before financial and fiscal charges. However, what really matters is its quality: how recurrent is it? How much does it depend on extraordinary components?

The central question is always the same: Is the ordinary business able to sustain the loan repayments?

Financial structure and debt level

The second block of analysis concerns the financial structure.

Variables such as:

• overall indebtedness;
  
• Debt-to-equity ratio;
  
• distribution of deadlines;
  
• Average cost of debt.

Any new loan is placed in the context of the existing exposure to assess its hypothetical impact.

Information can be obtained from databases such as CRIF, which collects all data on loans applied for and granted, repayment progress and any delays or defaults, both from companies and private citizens.

If the company has high short-term debts, tight maturities, and recurring liquidity strains, the platform may feel that adding additional financing increases the risk too much. Many platforms use synthetic debt sustainability indicators, such as the ratio of operating cash flows to total annual installments. 

Liquidity and ability to generate cash

Profitability must translate into cash for Demonstrate creditworthiness.

For this reason, platforms analyze carefully:

• operating cash flow;
  
• Credit collection cycle;
  
• Average supplier payment times;
  
• Possible seasonality of flows.

In some cases, bank statements are also requested in order to assess the actual trend of financial movements.

The goal is to verify that:

• The enterprise generates sufficient flows;
  
• the term of the loan is consistent with the financial cycle;
  
• there are no structural imbalances between income and expenditure.

A 24-month loan, for example, must be compatible with the ability to generate cash during that period. If the loan is to finance working capital, the turnover of inventory and receivables becomes a central element of the assessment.

Based on the quantitative elements we have listed, algorithms and humans evaluate the solvency of the company and attribute a risk class to the loan application, which will then influence the interest rate charged.

But there are more than just numbers.

The qualitative elements affecting the evaluation

Lending crowdfunding platforms complement quantitative analysis with a qualitative assessment of the enterprise. This step is less standardized than financial scoring: we talk about the business model, organizational structure, and context in which the company operates.

While it is true that quality elements are more relevant to companies that want to make equity crowdfunding, even in lending crowdfunding can have a major impact on the final outcome of the selection.

Business model and operational risk

One of the first questions an analyst asks is: Where does the revenue come from and how predictable is it?

Among the aspects that are examined:

• Concentration of turnover on a few customers;
  
• dependence on a single critical supplier;
  
• recurrence of revenue;
  
• Level of exposure to short-term contracts;
  
• Operational complexity of the model.

A company that generates recurring revenues, with a diversified customer base, tends to be perceived as less risky than a company that depends on a few episodic orders.

Also the Consistency between loan use and operational activity is a relevant qualitative element. A loan intended to support an increase in inventory in a company with high seasonality, for example, may be evaluated differently than a loan required to cover structural losses: in the former case, the loan serves to anticipate a temporary need for working capital and is a financial management tool; in the latter case, it serves to cover a structural imbalance and becomes an additional risk factor.

Despite this, the lending crowdfunding is also often used in response to liquidity crisis: can be done if these are part of a coherent and reliable overall and historical picture of the enterprise, or if they represent a momentary crisis with an already well-defined resolution plan.

Governance, transparency and accountability

The quality of the information provided is an indirect indicator of reliability.

Platforms evaluate:

• clarity and completeness of the documentation;
  
• Consistency between statements and objective data;
  
• Timeliness in providing supplements;
  
• Any history of dealing with the credit system.

A firm that presents neat data, timely explanations, and a consistent financial plan reduces perceived uncertainty. Conversely, inconsistencies or reticence may generate additional insight or negatively affect the risk class.

Many risk assessment models also include factors related to the quality of management and organizational strength.

Sectoral risk and competitive environment

Another qualitative element concerns the sector to which the applicant enterprise belongs.

Platforms may consider:

• volatility typical of the industry;
  
• sensitivity to macroeconomic factors;
  
• Any regulatory constraints;
  
• level of competition.

Some industries are structurally more cyclical or more exposed to external shocks. This does not mean that a company operating in such areas cannot obtain a lending crowdfunding loan, but that the risk assessment might be more prudent.

In addition, the competitive positioning of the company affects the perception of risk. A company with a well-defined niche or multi-year contracts may have a more stable profile than an operator in a highly fragmented, price-driven market.

The framework we have presented makes it clear that credit scoring is not just a snapshot of a balance sheet, but an integrated analysis of economic data, financial structure, and operational characteristics of the enterprise.

To continue to learn more about this topic, read our article on How the interest rate is set in lending crowdfunding and the article on How to pass the selection of a crowdfunding platform.

A concise guide: how to prepare for creditworthiness evaluation

Before applying to a platform, the enterprise should have ready:

• latest filed financial statements;
  
• updated economic and financial situation;
  
• Details of outstanding debt exposures;
  
• Realistic business plan;
  
• explanation of any critical issues (e.g., a temporary drop in margin).

Significant space should also be devoted to explaining the use of the loan. If the use of the funds is not linked to a predictable cash flow, in fact, the platform will perceive a higher risk.

It is therefore necessary to clarify:

• what the loan is for;
  
• How that employment will generate cash;
  
• How long the expected return will support the repayment of installments.

We conclude by emphasizing that. Is it a mistake to apply simultaneously on multiple platforms. Multiple requests can be interpreted as a sign of financial strain and lack of consistency and seriousness. Better to do first A thorough analysis of the best platform for one's needs. For this very purpose, Turbo Crowd has designed the Platform Match service: contact us to find out!