INNOBIZ Loan: the credit loan to SMEs through the technology valuation rating

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INNOBIZ Loan: the credit loan to SMEs through the technology valuation rating

South Korea
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Our solution, INNOBIZ Loan, is an innovative company rating system and credit loan for SMEs. Even early stage technology based firms can receive a credit loan without any collateral, credit guarantee or financial history once their technology receives high rating from Korea Technology Finance Corporation(KOTEC)

About Project

Solution: What is the proposed solution? Please be specific!

This solution is unique largely from four perspectives. First, INNOBIZ Loan employs an innovative corporate valuation/financing approach to technology based SMEs. KOTEC’s valuation system named KTRS is based on the technology potential of client companies, not on the conventional financial approach, making it possible even for technology based start-ups to gain access to financing sources. KTRS is composed of 45 qualitative and quantitative indices, most of which are the key success factors in technology. Although it has different criteria from conventional financial analyses, those indices are validated through statistical analysis which clarifies the relationship between the indices and the companies’ risk. Second, it enables SMEs to qualify a loan without providing collateral to commercial banks. The conventional SME loan has required collateral of SMEs in order to secure the commercial banks’ loan. Additionally, commercial bankers spend much time and resources on evaluating SME’s credibility. Despite those requirements, it remains difficult for commercial banks to issue loans to startups, especially because they often lack the financial records to establish a track record of success. Third, it promotes the technology development of SMEs in the developing or underdeveloped countries that want to transform their economic competitive edge from low labor costs(Labor-Intensive) to high-technology(Technology-Intensive). The technology rating system can be applied by the governments in such countries to screen promising companies that can be the beneficiaries of government project funds. Fourth, it reduces the transaction cost of commercial banks as KOTEC evaluates the credibility and potential of client companies using a far more efficient approach than currently practiced.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

INNOBIZ Loan through TAC contributed the credit based loan practice to SMEs that have been dependant on collateralized loans. <The Case Study> Although XYZ company(the reference company mentioned as a SME benefited from this solution below) had a great potential in their patented technologies, it had difficulty accessing financing sources due to the short and weak financial performances. So, KB introduced the company to KOTEC in order to find out the objective technology & business potential of this company. Through the rigorous technology valuation process from KOTEC, we could extend the credit-based loan a KRW 300 million(or USD 255,000). With that support, XYZ company could launch its new products in 2010 and increase sales by around 50%(KRW 14 billion by the June of 2010 from KRW 19billion in 2009)
About You
Organization:
Kookmin Bank(KB)
Visit website
About You
First Name

Hyun Bok

Last Name

Lee

Your Organization

Kookmin Bank(KB)

Country
About Your Organization
Organization Name

Kookmin Bank(KB)

Organization Phone

82-2-2073-3124

Organization Address

9-1, 2-Ga, Namdaemun-Ro, Jung-Gu

Organization Country
Organization Type

Private Institution

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Your solution
Country your work focuses on

, XX

If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Africa, East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, South Asia, North America.

Range of turnover in your target firms, in USD

Less than $1 Million, $1-5 Million, $6-10 Million, $11-20 Million.

Average turnover in USD of your target firm

Less than $5Mil.

Number of employees in your target firms

Fewer than 5, 5-24, 25-49, 50-74, 75-99.

Average number of employees of your target firm

Less than 50

Specify the size, average and range of expected loans or investments in each target firm

Any company that meets the definition of SMEs under Korean Law can qualify for the Innobiz Loan. The average size of the loan is USD 200,000/company. But the size and interest rate of the loan varies depending on the KOTEC's Technology Rating(KTRS)

What stage is your solution in?

Operating for 1‐5 years

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

he public intervention is deployed to establish the credible company data and rating of the technology potential of SMEs. KOTEC, the government-funded institution, has designed a unique technology evaluation and screening system in which commercial banking institutions cannot invest. Once KOTEC does due diligence and technology valuation of our client company, it provides us with the technology and company information with KOTEC’s own rating, called Technology Appraisal Certificate (TAC). Using this certificate, Kookmin bank(KB) launched the INNOBIZ loan that rendered credit-based loans to early stage but promising SMEs.
Before the INNOBIZ Loan was introduced, collateral-based lending practices, primarily referring to past financial track record, have prevailed in the Korean banking sector because private banks lack the capability to accurately assess the future business potential of loan applicants and hesitate to establish those valuation systems due to the high transaction (operation) costs. Thus, small firms with commercially viable technologies and excellent ideas are often alienated from access to banking, leading to a loss in the national economy. Furthermore, venture capital firms typically finance only a few scalable business ventures.
In particular, early or R&D stage SMEs often fall short of funding either from private sector or public sector due to tech-sector specific uncertainty added to the risks from small company size. To solve this pain point, KOTEC developed its own unique company valuation system, called KTRS which provides a customized valuation service for technology-based SMEs in various industries.
So, those needs motivated KOTEC to develop the evaluation system (KTRS) that provides banks with enough useful information for them to issue credit-based loans to SMEs. What makes KTRS different from other credit rating systems is that this system focuses on the technology potential and key success factors of entrepreneurs rather than on analysis of the SME’s financial history
KTRS produces a grade out of a matrix combination of Tech Level and Risk Level. Tech Level is measured based on variables from AHP analysis relevant to technological capacity, business competency, and commercialization potential. Risk Level, on the other hand, assesses the default risks associated with the technology business variables which are established and tested through regression analysis.
Through KTRS and its distinguished infrastructure, including 116 PhDs in engineering and science, KOTEC reduces uncertainty associated with technology-based SMEs and enhances SME access to credit by evaluating future potential rather than past financial track records.
It would be difficult or too expensive for a single bank to set up and utilize such an infrastructure for decision making on low margin (around 2% of loan amount), high risk SME loans.
*AHP Analysis: The Analytic Hierarchy Process (AHP) is a structured technique for dealing with complex decisions. Rather than prescribing a "correct" decision, the AHP helps the decision makers find the one that best suits their needs and their understanding of the problem.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs, Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

a)Asymmetry of information:
It provides the commercial banks with full information on the companies’ potential that cannot be described in the financial information.

b)Informality :
The valuation system of KOTEC is composed of 45 indices that define the key success factors of client companies. Also, most of the indices are represented by quantitative valuation. There is slim chance for the evaluator to make his/her decision at own discretion.

c)Lack of collateral :
The system promotes credit-based lending, not collateral-based.

d)Lack of financial capacity :
Even high risk but technology based firms can access financing sources without any collateral or credit guarantee

e)Lack of SME access to skills / knowledge / markets :
SMEs that achieve a high KOTEC’s technology score can promote their technologies with a certificate, facilitating market credibility for their technologies. Moreover, the certificate could be used in the technology licensing/transfer process. This rating system motivates other SMEs to develop their technology to get a high technology score from KOTEC in order to facilitate their funding sources.

f)Unavailability of financial products tailored to SME needs:
The certificate is also applicable to the key information of venture capital firms when screening companies for investment potential. Also, it can be used in the selection procedure that finds the beneficiaries of government project funds.

g)Lack of institutional capacity of financial intermediaries:
Financial intermediaries can streamline the investigating procedure when KOTEC is involved in the valuation procedure. With this edge, they can more focus on other more profitable business.

h)High transaction costs for financial intermediaries to serve SMEs:
KOTEC can reduce the cost incurred in the valuation procedure.

i)Lack of competition / incentives for financial intermediaries to serve SMEs:
Currently, more than 10 commercial banks are involved in the KOTEC’s technology certificate system.

j)Underdeveloped local capital markets (term local currency funding, exit options for SME equity):
The certificate can be used as an indicator when formulating various investment programs and exit strategies for SMEs.

k)General barriers to SME development related to investment climate:
For those start-ups in which financial intermediaries are unwilling to invest, KOTEC can improve access to funding sources.

l)Lack of financing to women entrepreneurs:
The KTRS rating system \adds points to companies which are run by women. While this system represents the public spirit of KOTEC, it is also based on economic validation. The risk of default is negatively correlated with the presence of women entrepreneurs in management, according regression analysis.

m)Specific barriers to fragile and weak states:
It can be applied to any underdeveloped or developing countries which striving to transform their industry from low-wage based to technology based.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Since its inception in 2006, the INNOBIZ Loan has enjoyed exponential growth, increasing from one company with a loan of USD 340 thousands to 95 companies with loans of USD 14,556 thousands. As the end of June 2010, USD 11,374 thousands were provided to 58 companies. This growth validates the credibility of KTRS and the efficiency of TAC program. It is also notable that most of the companies are early-stage and technology-based firms that would not otherwise have been likely to find funding sources.
(NOTE: The calculation of USD is based on the exchange rate of Aug 18 2010, USD1:KW1,176)

How many firms do you expect to reach?

In 2010 we expect to provide INNOBIZ Loan to 116 companies, totaling USD 22,748 thousands.

What is the volume of private SME finance you aim to catalyze?

KB hopes that this technology based rating system could replace the conventional credit rating system based on financial analysis. Considering the volatility of SMEs’ business, we could not fully trust in the financial track records of SMEs. In that sense, the future based valuation model would be the best alternative to the credit rating system

What time frame will be required to reach these targets?

KB are on the way to set up a specific time frame as this program is consistant with SMEs needs.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

*Government Perspective
The first hurdle is the rapid changing of government policies. TAC was initiated as the one of the economic policy that fosters the technology level of SMEs. However, there have been a few cases that many policies have been changed due to the change of government power, or the emphasis on the short-term performance.

Another obstacle is the cushion against the default loss of this TAC program. Even if KOTEC provides rigorous information on the companies, it is inevitable that some companies that receive a high TAC rate could face default.

*Commercial Banks Perspective
As the commercial banks are not accustomed to credit based loan the SMEs, which especially do not have the historical financial records, most bankers don’t have monitoring system how to keep track of client companies’ performance during their development. A monitoring system based on technology trends is needed. In addition, there are emotional and systemic pressures that deter the bankers from issuing a credit loan to the SMEs. Training for bankers on this new technology valuation is necessary to relieve those pressures.

*KOTEC's (TAC Provider) Perspective
Considering the technology cycle is getting shorter, KOTEC should provide updated technology information to banking institutions. Furthermore, KOTEC needs to enhance its consulting service to SMEs so that client companies should adopt preemptive business strategies in case that their technologies loose the competitiveness in the market

Sustainability
List all the funding sources that are required for the sustainability of this solution

To succeed in this innovation, we need some of government financial support for this program, the subsidy to interest will be of help to lower interest rates. Generally, the credit based loan has a higher interest rate than the collateral based loan, adding pressure to the SMEs. Therefore, it is necessary that Government provides subsidy or risk sharing program that minimize the financial burden of SMEs and commercial banks.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

When it comes to the financing dependency from Government, KB doesn’t get any financial assistance directly from public finance or government subsidy. KOTEC is playing as a funneling channel of Government assistance into the commercial financing program.

The one of the cost needed to pay to KOTEC is the valuation charge, which is USD130 (exchange rate KWD 1,176 per USD1). Currently, about 75% of this charge is subsidized by the Government.
There is a common consensus in the market that this is effective public spending, considering the effect of this subsidy.

To fully graduate from dependence on public finance, there are a few conditions for credit based loans for SMEs to settle down.

*A thriving Technology Appraisal Certificate(TAC) Market: The market growth of TAC will advance the profitability of KOTEC, whose costs had beend dependant on Government budget.

*Enhanced information of TAC: Currently Technology Appraisal Certificate comprised of the company’s brief overview of business, technology marketability, etc. It is KB’s own opinion that TAC could be more useful if it carries more in-depth information on the financial forecast and strategic opinion..

*Enhanced human resources in banking institutions: the job training for bankers are needed to further understand how to operate the non-collateralized loan and the trend of technologies in each industry.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

It is necessary to establish the rigorous technology valuation system of KOTEC, to setup the credit ceiling in proportion to the technology rating on TAC, and to set up the follow-up management system to help the troubled companies to turn around.

KTRS is the proved valuation model to screen out the companies that have higher default possibility, protecting banks from the potential loss of non profitable loan. KTRS produces grade out of matrix combination of Technology Level and Risk Level. Tech Level is measured based on variables from AHP analysis relevant to technological capacity, business competency, and commercialization potential. Risk Level, assesses the default risks associated with the technology business variables of which are established and tested through regression analysis.

However, as the technology is rapidly changing, it is indispensible to keep KTRS updated to represent the up-to-date technology trends and industry information. Furthermore, KOTEC should provide us with the full management information beyond technology so that we could fully understand the client company’s credibility.

The credit ceiling according to the technology rating will not only relieve bankers’ burden to make a decision to how much they should issue a loan to clients.

The follow-up management which monitors the debtors’ performances is another key to protect potential loss. Unlike collateralized loans, this credit based loans has little chance to secure the loans the debts once the debtors go bankrupt. So, the preemptive measure such as monitoring, risk management, the debt restructuring is the key for this program to survive.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

The partnership with Korea Technology Finance Corporation (KOTEC) is an integral part of this business to further success in that KOTEC provides the key information of the prospective client SMEs. Therefore, the interactive information and feedback between KOTEC and KB will further develop the credibility of INNOBIZ Loan.

We are also dependant on the partnerships with the government. Government plays a key role in providing Government Project Funding with lower interests rates than other commercial loan programs, relieving the financial burden of SMEs.

The technology transfer firm or venture capital will be promising partners that provide exit opportunity to the client SMEs. It is also an important partnership as most SMEs need the different financing sources across every stage of their development milestone.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The non-financial threats could be described from the three points of view.

*Lack of Human Resources
: To execute rigorous technology valuation of SMES, KOTEC further needs to enhance its human resource who will investigate the client companies. Although KOTEC has the largest technology valuation institutions that has more than 120 PHDs in the engineering or business area, it still fall behind of the market demand considering the variety technology sectors and the number of SMEs in Korea. The lack of human resource might sacrifice the quality of the TAC.

*Lack of Technology Market
: The technology market is necessary to protect the possible default of technology-based companies. We can define that technology market is the market for technology transfer, licensing, or M&A. As the most client companies are in an early stage, they have little chance to get listed on the public Stock Market(i.e: Kosdaq, Kospi). That means we need to another chance for the troubled companies to safely exit.

*Lack of Stability(of Technology)
: The ever changing technology environment is the last but not least threat to our proposition. Under this 21 century, it is common that the new technology were in the spotlight of consumers yesterday but thrown out to the trash can today. So AAA grade certificate of a company one year ago does not guarantee the profitability for the next 10 years.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

INNOBIZ Loan through TAC can be applied to any sector and any country that seeks for the technology development. The goal of this program is to boost the technology-based industries that will be the next growth engine in Korean economy, such as information technology, biological technology, and also culture technology. It also supports “Green Technology” which lessens the emissions of cardio, contribute to the sustainability of the Earth. The technology development and sustainability became global issues beyond South Korea.

Especially this program is highly recommended to any emerging countries which want transform their economy from the low-labor cost based one to the technology based. It is natural that countries under developing stages face the stand still as their price competitiveness are dampening. Furthermore, the price competitiveness is not desirable in that most of them are dependent on the lower wage. The development of technology-based SMEs is integral not only for the further growth of countries, but also for the life quality of laborers.

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