Afranga transitions away from loan claims to a more flexible and transparent product – Business loans. Business loans are direct loans provided by investors to borrowing companies. With this make a bold new step towards a regulated crowdfunding product.
Key takeaways:
- Afranga loans become regulated crowdfunding instruments called Business loans.
- Each investment represents a direct loan from the investor to the borrowing company.
- The calculation of accrued interest remains unchanged.
- Each Business loan is governed by a Key Investment Information Sheet document.
Introducing Business loans
Business loans are financial instruments that enable investors to invest in loans within a regulated environment. Each business loan is issued to a respective borrower. Every borrowing company undergoes a strict due diligence process and only approved companies can issue loans on the platform.
Each investment represents a direct loan from the investor to the borrower. Investors have the option to invest in an entire business loan or just a portion of it. When an investor commits funds to a business loan, they enter into a loan agreement with the borrower.
The minimum investment in a business loan is €10. Investors can hold their investment until maturity or choose to offer it for sale on the secondary market.
Investor benefits:
- Reduced complexity and transactional volume
- Flexible repayment schedules tailored to investors’ investment goals
- Early repayment option available for a fee
- Improved legal collection process
Loan funding window
Once published, a business loan has a funding window, typically 7 days, during which investors can make investments into the loan. The funding window is determined by the loan closing date which investors can find in the Loan details page. Once the closing date is reached, investing into the loan is no longer possible and the invested funds are distributed to the borrower.
Investors can make multiple investments into a single loan while the funding window is opened.
Accrued interest
Interest on Business loans accrues similarly to how it does on loan claims. Each loan features a fixed maturity date and a predetermined interest rate. Repayments are made according to the loan’s repayment schedule.
When a Borrower makes a repayment, these funds are automatically distributed among the investors’ accounts proportionate to their investment.
No interest is accrued on committed capital while the funding window is still open. Interest starts accruing once the closing date is reached and the funds are distributed to the borrower.
Repayment schedules explained
Business loans are flexible financial instruments. They allow us to create loan repayment schedules that offer both diverse investment options for investors and meet the borrowers’ capital needs.
Both interest and principal repayment can be made in monthly, quarterly, semi-annual or annual installments. Some Business loans can repay interest and principal at maturity. Investors will have a wider selection of investments to meet their investment goals.
Early repayment
Unlike loan claims, Business loans do not allow early repayment of the loan at the expense of investors. When an investor finds a loan with an attractive interest rate, he can lock in his money for the entire duration of the loan, knowing it won’t be repaid early only to be refinanced at a lower interest rate.
To offer maximum flexibility to both investors and borrowers, an early repayment option is available. When a loan comes with an early repayment option assigned to it, this is visible in the Loan details page. When a borrower decides to repay a loan before maturity, investors are compensated in the form of early repayment fee. The early repayment fee is typically 1-2% of the outstanding principal amount.
Security
Business loans provide better security and transparency to investors. The direct loan structure makes it easy to trace and prove the amount of debt owed by the borrower to investors. This aids legal collection process in the event the borrower defaults on a loan. Investors can easily undertake individual or collective legal actions against the borrower.
Under the new regulatory setup, the borrowers are liable for the loan with all of their company assets. This is a major improvement to the old setup where investors had investments in individual loan claims making it difficult to trace their actual status or amount.
Withholding tax
Interest earned from loans on Afranga is subject to withholding tax. The applicable tax rate is visible in the Loan details page. Depending on the borrowing company’s jurisdiction, some loans might be exempt from WHT or have a 0% tax rate.
Investors can see both the gross and net interest rate in the loan repayment schedule. Tax rate is determined on a country by country basis. For example, loans issued by borrowing companies based in France will have 0% tax rate while loans issued by borrowing companies in Greece will have 15% tax rate. More information on tax related questions is provided in a dedicated article.
Key investment information sheet
In the new investment setup on Afranga, investors will have access to an in-depth Key Information Investment Sheet (KIIS), which offers comprehensive details about the Borrower and loan terms.
Each KIIS will present standardized information regarding the loan, including its currency, amount, repayment schedule, and details about any security provided. It will also outline any special terms associated with the loan, such as options for early repayment or extension. The document will include information about the borrower, such as their legal entity status, business sector, economic activities, key financials, and ownership structure.
Want to know more?
We have created a series of articles dedicated to the upcoming changes with the new regulatory setup. Learn more.