Knowledge is power in Grid Finance's revolution
Derek F Butler has plans to revolutionise the way SMEs access capital in Ireland
SME lender Grid Finance is expanding its offering to include a digital pension product targeted at the owners of small businesses. The company has engaged Conexim to provide the back office infrastructure on the product - as well as the regulatory umbrella - while Grid will act as distributor.
It is the latest piece of innovation being undertaken by the company, which is looking to build what chief executive Derek F Butler calls "a small business bank in all but name".
"It's absolutely clear as we've worked with small businesses in the last four years that they are heavily undercapitalised. And some business owners are really bad at planning for the long term - many of them don't have a pension," says Butler.
"We're building a small business owner pension product. That's currently in beta, and we expect that to be live in the market next year."
The company is riding high after receiving a €3m equity investment from Luxembourg-based Reech Corporations Group, which will help prepare for international expansion.
The focus is on growing in Ireland for the next 18 months, but the groundwork for moving into foreign markets will begin in that period.
Grid provides loans to Irish businesses via its online marketplace, which matches firms seeking to borrow with individuals seeking to lend money at a return.
Other products include invoice discounting, leasing and short-term cash flow loans secured against money owed to the borrower from credit and debit card transactions.
But perhaps its most compelling feature is a piece of intellectual property called the Grid Score - a measure of a borrowing company's financial health, akin to a credit score.
The company gathers bank statements and management accounts from the business owner, as well as other sources of data from places such as the Companies Registration Office.
This data is then put into Grid's model and a score between one and 100 is produced - Grid's staff then review the score and examine the individual case of the business person in question.
If the final result is 65 or more, they are allowed on to the Grid platform. If it is not, the company will provide feedback on what they need to do to improve.
This model makes it possible for some businesses which may not meet bank criteria to get access to capital.
The Grid Score might provide a way for Grid to enter foreign markets without the capital investment involved in launching the full platform. Instead, they could license it to foreign institutions.
"It's conceivable that we'll enter a market purely with a technology and Grid Score play, and we may partner with a bank in another location - it still gets us the same result, which is more business owners financed," says Butler.
"We think that the Grid model is unique in how it caters for small business owners, both with the diversity of products we have for small business owners and how we provide access to capital using the Grid Score.
"That model is directly applicable in a bunch of markets, not just in Europe, but further afield. We've a particular interest in emerging markets, in Asia and sub-Saharan Africa. So we'll start laying the groundwork for that international expansion next year and then look to international markets in 2019."
One of the company's early backers is Enda O'Coineen, of Kilcullen Kapital. O'Coineen made headlines last year when he became the first Irish person to compete in the Vendee Globe Challenge - an unassisted round-the-world yacht race.
"Banking isn't about money, it's about information," says O'Coineen, who set up the Czech and Slovak credit bureaux in the 1990s.
"People don't understand that the success of the American economy is about credit scoring," O'Coineen adds.
"The term disruptive is abused, but this is a disruptive force on banking... There's tremendous potential. We're only just at the start.
"We need choice. Thinking that there's two or three banks and that's where you go to, that's Communist thinking. This is not bank-bashing. But we need choice and competition."
Kilcullen and others have set up a business called Green Dragon Finance, a syndicate through which it and others can lend money via Grid.
The business has about 2,500 individual retail lenders active on its platform.
The peer-to-peer lending model is not regulated here - something that would probably help to boost ordinary individuals' confidence in lending on the platform.
Butler has been active in seeking to have regulation imposed on the parts of the business that, in his opinion, need it.
"We do not believe there is a requirement to regulate the business borrowing component. We voluntarily comply with SME collections policies as set by the Central Bank, but outside of that, there's really no need to regulate the activity of business borrowing... businesses are adults, they stand on their own two feet. It does not need to be regulated," says Butler.
"On the lending side, we have family offices, institutions, and small retail lenders all lending and investing on the Grid. We do not believe that a US hedge fund needs regulatory protection - it's private, highly-sophisticated institutional capital.
"The component of our business that needs absolutely a regulatory overlay is retail investing and retail lending. We have 2,500 registered retail lenders on the platform.
"We followed UK best practice in ensuring that their money is adequately protected, segregated and controlled. There are long-term contingency procedures to administer the loan book.
"We've ensured that we've had absolute best practice in protecting retail lenders. That's where there's a need for a regulatory regime, exactly akin to the UK."
The Department of Finance launched a consultation on this matter earlier this year and the outcome is still being awaited.
Part of the life of being an entrepreneur is juggling many tasks at the same time. It's something of a rollercoaster, says Butler.
The company has had ups and downs, but today it employs 14 people, with plans to increase that to 22 by the end of the year.
"There's an enormous opportunity to build a new force in small business banking that competes directly with AIB and Bank of Ireland," says Butler. "That's always been the objective of this business and we will continue to do that."
Sunday Indo Business