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Maiden UK loan guarantee for European Investment Fund sees £40m committed

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Orange Money, which consists of ezbob and Everline after a merger deal in February, is the first UK lender to sign a loan guarantee agreement under the EU programme COSME.

The COSME Loan Guarantee Facility (LGF) funds guarantees and counter-guarantees to financial institutions to help them provide more loans and lease finance mainly up to €150,000 to SMEs. Orange Money will now be able to “substantially increase” loan volumes to SMEs by supporting a new portfolio of loans worth up to £40m over the next two years.

Speaking with Real Business, Orange Money COO Russell Gould revealed that ezbob were originally supported by the European Investment Fund (EIF) through a programme called the European Progress Microfinance Facility. That framework saw the lender receive an initial £6m guarantee and then subsequent £2m amount.

“We have provided something like 690 loans using that services so far,” he explained. “We were then approached and talked to about this agreement. The COSME programme runs from 2015 to 2020, and we have been in discussion with them for some time.

“The good thing is it gives us a massive endorsement for the EU. They’ve done a full audit of all of what we’re doing – from risk processes to the existing book.”

The guarantee works by the EIF underwriting 50 per cent of losses on any loans provided through the agreement.

While Orange Money is the first UK lender to be supported this way, others around Europe to receive capital guarantees from the EIF and its EPMF include Aws in Austria, LfA in Germany and Microbank in Spain.

Gould went on to explain that the announcement was a big development for three reasons. Firstly, his firm are the only e-lender the EIF is providing to in this way. Secondly, it is an endorsement of its underwriting and risk. Thirdly, and most importantly he emphasised, is its importance for small businesses.

“There are two things it gives us in that regard. It de-risks us a little, so allows us to be more aggressive in our approach to lending. As a small business ourselves, we need to be cautious and then learn before coming more aggressive. This gives us that leeway to be more aggressive,” he added.

“Also, having 50 per cent underwritten allows us to ensure that we are competitive as we can be on pricing.”

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The finance guarantee agreement is the second major announcement for Ezbob and Everline since the duo’s merger in February. Earlier in March, Chinese ecommerce giant Alibaba closed its first SME financing deal in Europe by partnering with ezbob and iwoca to supply trade finance when goods are purchased.

Under the terms of the partnership, which will be called the Alibaba.com e-Credit Line, small and medium-sized businesses will be able to apply for a line of credit, receive approval, and then use that credit to make multiple draw downs to finance purchases on the platform. Funds are then disbursed directly to the supplier in China, facilitated by either ezbob or iwoca.

Explaining the tie-in with the Alibaba deal, Gould said: “That deal is a trade finance solution to businesses and those companies that fit into the COSME structure will benefit.”

Commenting on the agreement, EIF head of EU guarantee facilities Gunnar Mai said: “I am delighted to be signing our first guarantee agreement with an SME online lender in Europe under the COSME Programme. The £40m of new loan finance for UK entrepreneurs from Orange Money will help to create jobs at a time when access to finance continues to be a pressing issue for the UK as well as European economy.”

When quizzed on whether the agreement would see Orange Money expand it operations into Europe, Gould said that for the time being the UK market is absolutely ripe.

“Small businesses are being let down by banks, and the government is getting involved to help small businesses. From my perspective there is so much more to do here.

“The UK will be our 100 per cent focus for the short and medium-term – but once exhausted, and we are the clear leader, we will look to other regions. The good thing about our technology is that we can plug into other regions, money and credit bureaus – working from day one.”

The EIF designs and develops venture and growth capital, guarantees and microfinance instruments specifically targeted at micro, small and medium-sized businesses. EIF’s total net commitments to private equity funds amounted to over €7.9bn at end 2013.

Image: Shutterstock

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