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Agriculture Loan Scoring Launched

Kristīne Kastanovska
 filed under 
September 30, 2022
8 min read

The crowdlending market has experienced many interesting developments over the last few years. One of the most promising additions to it has been agriculture and forestry lending.

Although loans to farmers and forestry businesses are still a recent addition to the space, they have already generated much investor interest. 

Some of the main benefits that investors and platforms mention with regard to these loans:

  • Loans are mostly secured by heavy machinery, land, or grain, and frequently also EU and/or personal guarantees
  • The returns have a low correlation with other crowdlending types such as real estate and consumer lending, indicating that agriculture loans might be great for portfolio diversification
  • Loans provide social benefits as the biggest beneficiaries typically are small and medium-sized farmers that are looking to expand their operations and provide us with better farming.

Despite the benefits, because no investments are risk-free, and because there is little historical loan performance data, many investors are wondering about the credibility of this loan type and are unsure which platforms and loans are best suited for their investments.

To continuously shed light on the matter and help investors make informed investment decisions, we are launching the industry’s first agriculture loan scoring that you will find in our Agriculture Investing Guide.

The scoring is currently available for 2 platforms - Lande and HeavyFinance.

The remainder of this post will be dedicated to explaining how we score agriculture and forestry loans and outlining our risk and reward evaluation logic.

Risk Scoring basis

As we have already established, agriculture crowdlending has not been around for too long, so there is very little historical data and historical defaults. 

Consequently, it is not possible to undertake any meaningful statistical analysis and determine the loan characteristics that affect the default likehoods the most. 

This, however, does not mean that no value and information can be provided to investors. 

To determine the risks of particular loans, we have decided to 1) evaluate the platform itself and 2) assess the general characteristics of the loans. 

Importantly, even though we usually refrain from evaluating platforms, we feel that agriculture platforms have not been around for long enough to gain as much credibility as LO-based platforms like Mintos, Peerberry, or even real estate platforms like Estateguru have. Hence, we feel it is important to evaluate the platform risks as well.

The final Risk Score combines both aspects.

Platform assessment

To determine the platform's trustworthiness, we score a total of 27 metrics across 5 categories (a few examples of the metrics we evaluate are given as bullet points):

Regulation, licenses & stability
  • Whether the platform is regulated
  • Whether the platform has a separate account for investors' funds
  • How long the platform has been operating
  • Are the user agreements, assignment agreements, and other legal documents freely available
  • Does the platform share its annual reports
  • Does the platform share its portfolio statistics
  • Is it mentioned who owns the platform
  • Whether the platform is making money on its operations
Liquidity of the platform
  • Is there a secondary market
  • Is there an early exit option
  • Is the funding volume growing
  • Whether there is a live chat
  • Whether the support team replies in a reasonable time (up to 3 business days)
  • How frequently are there news & updates from the platform

Each metric score is weighted and then added to the total platform score.

Loan analysis

Given the limited data on loans’ historical performance and on current loan characteristics, we review only the following 5 core loan parameters:

  • Loan-to-value (LTV) - the lower, the safer the loan
  • Collateral - secured vs unsecured loan
  • Valuation of the collateral - whether appraisal (valuation) report copies are provided
  • Strength of collateral - in case of grain, whether it is insured; in case of real estate or land whether it is secured by first rank mortgage
  • Other guarantees - whether a loan has personal/business surety; in case of grain, whether a sale agreement is concluded with a 3rd party

Both aspects of the Risk Score are then added together and we arrive at the Risk Score of a particular loan.

Total Score

As with scoring of loan originator-based investment opportunities, agriculture loans’ Total Score is also calculated based on the obtained Risk Score and the interest rate offered.

Here too the Total Score displays how much return can you earn from an investment in a particular opportunity per unit of risk you undertake.

Intuitively, the loans with higher Total Scores are likely to generate greater returns, even when adjusting for their risks.

Ready to start making informed agriculture lending decisions?

Investing Guide

Below you can see an example of Agriculture Investing Guide and the data it provides.

The view gathers most important loan and decision-making data:

  • Platform where the loan is listed
  • The loan number, so that you can easily identify it on the platform
  • The country where the project implementation takes place
  • Red & orange flags that help you be more informed on potential risks
  • Loan amount
  • Term to maturity
  • Loan-to-value (LTV) - the loan amount vs the value of the collateral
  • Interest rate
  • Risk Score category with A being the safest
  • Total Score - the risk adjusted attractiveness of a particular loan as an investment opportunity

As with rea estate, the Agriculture Investing Guide update is included in the existing pricing plan, so now you can enjoy Investing Guide for a total of 17 EU leading platforms.

Try it out here.

Kristīne Kastanovska

Our scoring, automation, and data chief. Risks, interest rates, correlations, optimal portfolio allocation, queries, and quite some regressions - just another day for Kristīne.

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