E 771 - Europe's SME Credit Gap Is an Underwriting Problem

If SMEs are 99% of Europe's economy, why is the credit infrastructure behind them still slower, more fragmented, and less digital than the tools we use to order lunch? What happens when SME lending stops being a bank product and becomes a technology, data, and private credit infrastructure layer for Europe's real economy? Patrick Stäuble is the founder and CEO of Teylor, a Zurich-based SME financing platform combining direct lending, factoring, private debt, and lending software for financial institutions.

Teylor has acquired creditshelf, a former Startuprad.io guest, grenke's factoring business, and CapeTec; secured major institutional debt facilities; and is positioning itself as one of the leading consolidators in European SME financing. Hello and welcome everybody. How do we understand European SME lending if we stop treating it as a niche fintech topic and start treating it as economic infrastructure?

That all said, Patrick, welcome to Startuprad.io. Where should we begin if we want to understand the financing gap behind Europe's Mittelstand, SME, KMU, whatever abbreviation you use? Hi, Joe.

Great to be here and thanks for having me on. Looking forward to today's session. Obviously, as you can imagine, this is a topic that I love to talk about and spend a lot of time talking about. I think maybe the best place to understand it is that Maybe first to start by understanding how big the problem is, right?

The way that I always look at it is that, you know, if you look at the retail credit and retail banking market, everyone today - nobody today is going to the bank branch anymore. Everyone is using their mobile apps. Everyone's doing, you know, every financial service on the phone or online in the retail space. And then if you look at the US or the UK market, in the UK, something like 60% of small business lending is done through digital channels.

Wow. Now, in Germany, I think we're probably at under 5% of kind of small business loans that are being done in any kind of digital way, shape, or form. So we are, unfortunately, in Europe, I think, quite far behind. I'd say there's no structural reason why we should be so far behind, or there are reasons that are causing it, but not that should be there in the long run.

Talking about structure, may I interrupt you with my first question? Because when you look at European SME financing today, what are the structural problems that banks, founders, and policymakers still describe incorrectly? I think it's not necessarily a topic. I think people often describe it as a cost of finance topic, that it's too expensive or something like that to get a loan.

But I don't think that that's necessarily the case. If we look at the European market, the prices are not in itself bad. I think it's more an issue of - when I look at the market, it's more of an issue of the banks having legacy technology. I think in a lot of the banks in the kind of SME finance space, if you look at their processes, it's multiple different IT systems.

It's things that haven't been touched as much as maybe the retail banking space have. So it's an infrastructure problem. And the second thing I would say, obviously, it's growing regulatory pressure. I think nobody in the banking space would argue that it's gotten easier to run a bank over the last couple of years.

So as your regulatory costs, your cost of capital, your capital requirements have gone up, You know, people don't invest the money in the areas where the infrastructure is not there for it. And that's, I think, the real problem. I think we've got a lot of regulation and we don't have the infrastructure to allow the banks to really do this in an effective way. And I think that combined leads to this problem.

And I think that people misunderstand this because they think that it's just a cost of finance problem, which is not really the case. If I remember correctly, at the time I was still in banking, in management consulting, and A lot of people thought the new Basel rules for capital requirements for banks made the whole banking system safer. Yes, they did, but they also made it more difficult to hand out loans, which was one of the pieces people should look up when they look at the environment you're currently moving in.

That said, I was wondering which operating rule from your early career proved most useful once Teylor moved from startup lending into institutional credit infrastructure? Yeah, I mean, honestly, independent of what we've done in the past, I think the most valuable, let's say, operating rules, or let's say experiences that I've gained were actually not even in the startup world. It was actually before, you know, many, many years ago, I was actually in the Swiss military. And then I did some missions abroad for the Swiss military.

And I think the I'd say the self-discipline and the ability to suffer pain, I think, is probably one of the most important skills as a startup founder, whether it's on day 1 or day 1,000. It never gets easier. The problems are maybe bigger or different or more interesting. But I think you have to be at least somewhat of a masochist, or if not a masochist, at least have a high tolerance for pain to be able to do it.

So I would say that's kind of independent of the phase that we've been in. That's been probably my biggest thing that I've learned in the past. I think the other thing that kind of say a bit more specifically to what we're doing, I think it's the fact that you have to, having worked in fintechs and in financial services in the past, I think it's the fact that you have to treat your kind of capital and risk and all of these things are just as important as the tech and the product.

So I think a lot of maybe fintech founders in the past have said, you know, coming more from the tech side, saying this is a purely technical problem I need to solve. That's not the case, right? You need to, you know, you might have the coolest tech in the entire world. If your underwriting is garbage, it's worthless.

You're probably better off using an Excel sheet than you are with the fanciest technology. So I think never underestimating how important risk management and the really kind of boring banking stuff is to what you're doing, whether or not you're a fintech. That's served us well to kind of keep that in mind Yes, totally. And for saying one of the main skills of an entrepreneur is to tolerate pain, I think wiser words have never been spoken.

Yes, I can totally agree to that. I would say if there's one thing people can take away from this podcast, or let's say potential future founders take away, I think it's, it's you have to be aware that your resilience is probably much more important than any other skill in startup founding. The ability to chew glass every day and then ask for more is probably more important than anything else. Yeah, I think that's a great point.

The ability to chew glass. I will remember that. Okay, let's go a little bit back into SME lending. I was wondering why it is still so difficult to digitize when basically everything around payments, consumer banking, brokerage have already moved much faster.

Yeah, I think the, the, the, the big fundamental underlying difficulty that you have in SME lending is that every transaction, every client you have is extremely heterogeneous, right? So if you look at, in the, let's say, private lending space or anything like that, a customer who's earning, you know, €5,000 a month salary, has a mortgage, maybe has a car leasing, your average customer, it doesn't really matter if they're based in Hamburg and earning €5,000 or based in Berlin and earning €5,000.

With the law of large numbers and you know, based on how consumers are, the borrower profile is relatively similar. In the SME finance space, it's totally different. You can have a customer that's earning €10 million of revenue, and then it could be, you know, the same - the other business on the other side of the streets is also earning €10 million of revenue, but the company profile is completely different, different EBIT margin, different UBOs, different, you know, subsidiaries and stuff like that.

And I think that is the fundamental complexity of SME lending is how do you manage this heterogeneity of your client base? in a scalable way. And I think that solving that problem is what is difficult for banks, for fintechs, etc., to do.

And it's a problem that you don't necessarily have in the retail space. It's not a problem that you have maybe in the transaction space where most transactions, 99% of your transactions are going to be exactly the same. For us, no 2 transactions are the same because every client is very different from the other client, even if the headline numbers might look exactly the same. Um, so it used to be the case when I was still doing vocational training, starting at the bank, that SME lending was only bank lending.

So the rise of non-bank SME lending in Europe, is this a temporary response just to tight credit, or would you think this is a permanent transfer of a market share of, of a formerly very established, very much core business of the banks away from the banks? I think it's a fundamental shift away from the banks. So I think that every kind of lending, you know, that is not today a strength of the banks is going to move more and more off balance sheet of the banks. And we see this in a lot of markets through the kind of asset-backed securitization structures that you have many banks that say, okay, rather than service this customer segment ourselves, we're just going to do senior lending to a, you know, an SPV or an origination platform like Teylor.

And they can take care of the nitty-gritty, they're better at the day-to-day stuff than us. And we'll, and we'll provide the maybe senior capital or mezzanine capital for this. So that's very clearly the trend. We see a lot of, you know, in the US market, it's there again, 5 or 10 years ahead of us in this regard.

A lot of the lending is done on through non-bank institutions. And this trend is growing in Europe as well. And we see that this trend is also growing in Europe because It becomes more difficult for banks, as you said earlier, to lend on their own. But the growth of kind of ABS structures has been significant and you've got significant players coming into this market.

And on top of this, what you do clearly see is that the regulator, I think, is also pushing it in this direction. So you've got laws that have been passed over the last - so AIFMD II is a great example for this that allows now AIFMs, fund managers, to directly lend out of the fund vehicles. This is kind of you know, predestined and prestructured to allow these off-balance sheet structures. And at the end of the day, as this capital market gets more mature, as the cost of funding comes down, as there's more service providers in the market, it means that off-balance sheet lenders or alternative lenders become more and more competitive also on the side of the pricing and on the side of the capital that they have available, which means that they will eat this business away from the banks.

And I think that the banks are happy to give it away, to be honest. I mean, we've not seen in many markets the banks kind of outside of the UK and the US, let's say in continental Central Europe investing enough into this space. And I think in the past, probably they did it a lot because you do the SME lending so you can win the business owner as a wealth management client or as an affluent client. But the trend is very clearly towards the banks doing less of this business rather than doing more.

We may add for everybody without a finance background that ABS is asset-backed securities. You could Google it. It's like a whole universe of financial instruments. It's a mega universe.

Yeah. Yes. I was wondering, because a lot of questions we get as Startuprad.io as an international lens into the German-speaking DACH market is, how do you win a German Mittelstand customer that may have had the same, as we call it in German, Hausbank, meaning home bank, primary bank connection, this relationship for 20 years?

Yeah. So I think there's kind of always - I obviously get this question a lot, and I think it's one of the key things that we work on. I would say there's 3 kind of relevant components to this discussion of how do you win these customers. The first is you've got a big batch of customers that are anyway moving away from their kind of traditional dusty old bank in the sense that maybe in their private life they've already used N26 or Revolut, and then they don't understand why that doesn't work for their business life as well.

Or you've got the thing in that same category, you've got the change, the shift happening from the old generation. The boomer generation was a business owner, and then the young, the kids are taking over the businesses. And they just want to have a modern, up-to-date provider. So I would say that's kind of a big part of winning it, that you have this mentality shift happening in the market and in your target customer segment.

The second thing that we see a lot of is that, especially in Germany, for the foreign listeners who don't know this, you've had in the last couple of years this - the Sparkassen, the Volksbank, and a lot of the smaller regional banks, they've been consolidating, they've been shutting down bank branches, etc. So I think you have the banks in a sense are doing us a bit of a favor because I would say 20, 30 years ago, you know, you were probably in the same, you know, in your village, you had the bank branch and you probably knew the branch manager and you've had a relationship over many years.

Now, as these banks fuse, as the branches close, etc., I think that relationship is getting weaker and weaker and it's difficult for these business owners to get that local service that they maybe had 20 years ago compared to now. But the third point, and all of this, you know, despite all of this, it is an absolutely brutal sales activity. So there is no way around it.

There's no free lunch. So we have a very talented sales team. I would say we do, we get our leads through 3 primary channels. So one is outbound.

So everything from mailings to calls and stuff like that. Then we have a relative - the second channel is a relatively big partner channel. So that can be everything from embedded lending with kind of third-party tools or brokers. And then only a small amount is inbound.

So, you know, there is no way around it, no matter how good your product is. You need to have a hardcore sales team, you need to track it every day, you need to invest and optimize and change. So even if the market trends might be in our favor, it's not an excuse to relax, so to speak. And I think this kind of customer acquisition in the B2B space, or specifically in the SME lending space, again, I mentioned earlier how if you don't have your risk management point, it doesn't matter how good your tech is.

Even if you have your risk management and your tech on point, if you don't have a qualified, good sales team, good sales channel, it's a waste of time anyway. So that's extremely critical. Very slow grinding process. Oh yeah, going back to chewing glass again.

And when you talked about mailouts, I was personally experiencing, because I'm a small business owner, increasingly from the endless Uh, emails, I see increasingly that people start writing physical mailings again because you don't get that much anymore, and it, it's actually a USP for many. That's, that's an observation I found very interesting. But let us dig a little bit into your mind decision rule. What has to be true before Teylor says yes to SME credit exposure?

Yeah. So, I mean, the approach that we have is that we don't fund startups or kind of early businesses or something like that. We really look at companies that are established businesses that for whatever reason don't want to go to their house bank. So it can either be because their house bank is too slow or because they're maybe too complex for the house bank to understand.

So what we look at, our average customer, the average business that we finance is 12 years old. And we honestly probably have the same kind of underwriting rules or whatever as the traditional banks can have. Right? We look at things like the equity ratio, we look at the cash flows of the business.

The difference is we do it automated. So it takes us, you know, whatever, a minute to do the underwriting, while the bank does, you know, might take 3 months to do it. So that's kind of what we look at. You know, is there assets in the company?

Is the UBOs - do they have some, you know, enough financial stability that they could kind of maybe give a guarantee and things like that? And obviously, on top of all of this, a very, very thick layer of anti-fraud, because I think that Unless we're really sure that this is a real clean, good customer, we don't even bother with the underwriting, right? So we look for bread and butter, plain vanilla small businesses that from a risk perspective, probably every bank would be willing to do.

We just do it faster and more comfortably. False market assumption. What do you think is the most dangerous false assumptions, founders or investors? make about lending businesses?

Yeah, that's a great, great question. So I would say the first one is certainly what I mentioned earlier, that it's a pure tech game. It's not a pure tech game. Tech is a great, essential component to what you do.

But, you know, being able to structure a refinancing vehicle, being able to do proper underwriting is equally important. The second thing that I've seen a lot speaking to kind of younger, or not younger necessarily, but let's say newer founders, it's this topic of adverse selection, right? So you might have the feeling that you've really hit the nail on the head, and you're getting at the top of your funnel a ton of different customers and stuff like that. And it's all great.

But, you know, it's potentially a false signal, because the weird thing about the lending business is just because you're getting a lot of lending requests, that's not necessarily a good thing, right? It could be that you're getting a ton of fraudulent requests, it could be that you're getting a ton of requests, but from companies that are never going to pay back their loan. So I think thinking about the top of the funnel is often a big mistake that I think founders or lenders in general do.

You need to think, or inexperienced lenders do, because you need to think not about the top of the funnel, you need to think about, you know, how many people are actually landing at the end of the funnel. And then 24 months later, when they need to repay the loan, how much of that money is actually coming back. So having, you know, mistaking your funnel for something that it's not, when maybe it's actually an adverse selection, that's a big, big mistake that you really need to be careful to avoid.

And I guess any financial services kind of fintech. So those would be my 2 big takeaways. Anyone listening to this podcast, A, it's not just tech, it's also the underwriting and the infrastructure. And B, be very, very careful about how you celebrate your funnel and measure your funnel.

At the end of the day, your job as a lender is to give out money and to get that money back with interest. So just because someone is applying for a loan doesn't mean that that's a good thing. I was wondering, when you talked about fraudulent actions, we have seen in 2026 here at Startuprad.io that increasingly AI is used to generate fraudulent, in our case, for example, uh, partner requests.

So, um, unfortunately they still make a major mistake, those, uh, those, uh, scammers. Not gonna tell what it is, but, um, I was wondering, when I have this experience, there's much, much more money involved with you guys, did you see an uptick with the usage of AI and fraudulent utilization, fraudulent use of AI as well? Not so much yet. I mean, what we've seen much more is kind of especially the digital marketing channels, more kind of bot requests.

But I think the good thing is that there are also relatively good tools to identify these and to block them. Where we're kind of, I would say, safer a little bit in our regard is that when we analyze a customer, we pull data about this customer from multiple third-party sources. And a lot of these sources are ones that are relatively difficult to fake. Let's take a simple example in Germany, getting the commercial register extract.

If the commercial register extract doesn't match the information of the company, there's no way around it. So in some cases, you know, we - I'm a big believer in digitization and stuff like that. But having all of this data available from government sources in Germany is a very, very good filter. So we haven't seen that much of an uptick later in the funnel, although we do see more of an uptick at the beginning of the funnel with like bot-driven fake applications.

But they get filtered out very, very early in the funnel. And fortunately, we've not had any fraud cases or anything like that in really a very long time. So I was wondering about your product identity. What is Teylor today?

Is it a lender, a SaaS provider, a broker, a private debt platform, or consolidator talking about creditshelf takeover? It's a very good question. I mean, the thing is, I see it honestly all as the same thing. So from my view, we're a credit platform and our aim is, at the end of the day, what I tell my team every single day is In 5 years, in 10 years, every single one of us is going to look back and say, yes, it was totally clear that the small business lending segment was also going to become digital in the same way that all of us are sitting here today saying, yes, it was clear that mobile banking was going to change how banking is done and all of these things.

What I want us to be is I want us to be the credit platform that sits between the banks, the private debt players, and the borrowers and pushes this industry into the future. Because I think that there is - it's absolutely clear to anyone who is in this market that this industry needs to become more digital. And I I want us to be the platform that sits between all of these players. Now, how do we achieve that?

At the end, we've got one technology platform, one underwriting platform, and we can grow that by partnering. We can grow that by using it ourselves, or we can grow the business by buying other platforms and integrating them and bringing them onto our thing, onto our platform. At the end of the day, whatever I have to do to achieve that, whether it's buying other businesses and integrating them or making new partnerships, we will do it. We're entrepreneurs, we're opportunistic.

Um, but at the core of it really is this credit platform that sits between these different parties. That is a SaaS tool, if I understand it correctly. And as a SaaS provider, I was wondering, does vibe coding scare you? Meaning, one, in terms of competition, we've been seeing the collapse of share prices, Monday, Figma, whatever, since vibe coding is out there.

And secondly, Does it scare you in terms of product quality? It doesn't directly scare me in our industry. So I think that the benefit - I have 2 strong opinions about this. The first is, I just don't see how, let's take a financial institution, be it, you know, maybe a bank or a leasing company, etc.

Their core competency is not managing software solutions on their own. Right? They're going to buy a third-party solution because they want to be able to rely on someone else's ISO certificates, on someone else's regulatory-approved tools and things like that. And they don't want to maintain their own software.

Now, that fundamental, you know, how do you call it, fundamental assumption, I don't think changes whether they're buying a third-party cloud solution or whether they're, you know, building a tech solution in the old way or vibe coding it. At the end of the day, the financial services provider, they're good at sales, they're good at underwriting, and they're going to buy or, you know, from a third party these tools. The second thing with vibe coding, why I don't think that it's such a threat is because to our industry specifically, is just because of the regulatory requirements that we have.

You cannot - I mean, I've vibe coded many apps and kind of side hustles and whatever, as probably many of us have. But I can tell you that the kind of let's say, security requirements that my vibe-coded apps have for a honeymoon planning app is certainly not the same as the security and the data protection requirements that I have if I'm storing financial data about clients. So the hurdle to really making an effective vibe-coded app that will replace an underwriting tool or something like that is huge.

Now, where I do see kind of an interesting shift, especially in our company, is just every single one of our engineers, every single one of our people is just 10 times more effective. So had you asked me maybe 3, 4, 5 years ago, how big is Teylor going to be one day? I would've said 2,000, 3,000, whatever, a huge classic large number of people. Today, I think that's going to be very, very different.

I think that there is before too long going to be a company like ours, maybe it is ours or a company like ours that has a very small, very lean team with a very solid infrastructure, but where agents and stuff like that are running a lot of the work. And we've seen it in our teams. There's just just certain functions that we don't need anymore. And I think that's going to be more the bigger impact for ourselves and other players in the market, that just many of the functions can be automated away.

So what I hear is, if you would not be in a regulated business, you would be scared as shit. For sure. Absolutely. I mean, I think there's probably a hurdle of things where you kind of still want to use a third-party solution.

So for example, I would buy Salesforce shares because I think that You know, anyone who's worked with a CRM knows how much of a pain it is, or built a CRM knows how much of a pain it is to build a CRM and integrate it everywhere and stuff like that. So I would say complex kind of business essential tools, SAP, Salesforce, regulated tools for credit and underwriting, I would be super scared. I would not be super scared, sorry. But other tools where it's like, okay, I could vibe code this in a day.

I'll use a great example. We used to use Doodle. for our kind of coordinating our board meetings and stuff like that. What, you know, why would I now pay for the premium version of Doodle when it's a tool that I use maybe 5 times a year and I can build myself in an hour?

So there's a lot of kind of low barrier to entry tools that I think are maybe highly valued right now in the SaaS space, but are not gonna be here for much longer. An absence tracking and management tool, things like that. For these guys, I would be not just shit scared, but I would be thinking, you know, what can I do now to either get out of this or to develop into a more valuable part of the ecosystem where people are not going to just copy paste my tool. Talked about entrepreneurship is always about resources.

So I was wondering when you decide whether to put capital into organic growth, technology, lending volume, or M&A, what metric do you use to decide About your priorities. Yeah. So what we've, to give a concrete answer of how we decided this in the last 18 months, we saw in the last 18 months that the return on investment we were getting investing into organic growth was shrinking in the German market because the German economy is not doing well compared to where it was maybe 5 years ago, 10 years ago.

And insolvencies for small businesses are at an all-time high. So what we clearly saw was that it's taking us much more money to win a client than it did in the past. Um, so what we did is we basically, you know, took, took a look at that extra euro that we're spending and said, okay, if we spend that money instead to buy a competitor, uh, where we get then instantly a lot of clients, is that more worth it? And the, the, the silver lining of the fact that the German economy or parts of the European economy in general are weak at the moment is that there is also not much, um, or less kind of PE M&A activity, meaning that valuations are depressed, meaning you can buy competitors relatively cheaply compared to how it was maybe in the past.

So for us, it was that calculation that we said, okay, €1 of organic growth is returning, you know, less, 20, whatever the number is, 20% less than it did in the past. Can we get that growth cheaper by doing M&A? So it's really the return on investment of that marginal euro to achieve our growth targets is the kind of deciding factor. Very, very, very much.

My professor from microeconomics would be jumping with joy here. I also studied economics. So maybe I'm a bit biased in that regard. So actually, microeconomics is one of those topics I thought, if I would ever - will I ever need that?

And actually, it's something - it gives you a toolbox that came in handy, I think, more than a dozen times in my life already. So you never know what you learn for. I agree. I mean, I think for me studying it, I remember at sitting in university thinking like, God, this is all so abstract and theoretical.

But I think the valuable thing that I had, obviously learning the mathematics part was important, but also now dealing with all of these small businesses every day and actually seeing, you know, what are the factors that are pushing them to make these decisions and stuff like that. It's been interesting seeing over the last 7 years that I've been doing Teylor where we see, you know, the data from thousands of small businesses, interact with the business owners, what are really the things that are driving their decisions, what are the things that are hurting them, what are the things that are helping them.

Um, and kind of getting the, the real-world version of what I learned at university. You described Teylor as a lending platform, but banks are asking for your software, and CapeTec strengthened the SaaS arm. What would have to happen for software to become your main business rather than the synergy? It's a good question.

I think what would have to happen is that the sales cycle of onboarding a new SaaS client would have to get much faster, right? The nice thing about the lending business is because it's a transaction-driven sales business, I know relatively clearly if I invest one extra euro today, how much kind of new customers is that going to get for me over the next 18 months. When you're selling a software solution to banks, often the problem is that you have It doesn't matter if you have 1 sales guy or 10 sales guys.

If the procurement process of the bank takes 6 months, it takes 6 months, right? So, the levers that I have to scale that growth are less than any other side of the business. Now, we still see it as an incredibly important part of our business because there are very - our fundamental thesis is that this entire market is going to become digital, and we know that the banks are going to become digital one way or the other. So, it's better for us if they do it with us than without us.

And secondly, we know that there are white spaces in the market that we will never be able to serve because we don't have the money, we don't have the know-how, we don't have - maybe we don't want to serve it in certain markets. And if we have this technology, let's cover that white space in some way with this technology rather than doing it ourselves. So it is a critical part of what we're doing. It also helps us to treat our technology platform as a platform that is used not just by us, but by banks.

So we are a client of our own. Our lending business is a client of our tech stack in the same way that LBBW or a bank or whoever, our other clients use it. And I think it's a very smart and healthy way to work as a business, right? It's a bit this Amazon Web Services approach when they said, okay, everything that we're using internally has to be an API that we can use, that external people can also use.

And I think it instills in the organization a lot of discipline about how to build the products properly, because it's not just - we can't just hack it together for us. It has to work also for a bank, for a lender, for a leasing company. And I think it's one of our product strengths, I would say. So when a fintech starts buying competitors, licensing software to banks, raising institutional debt, and expanding across fragmented national markets, is it still a fintech company, or is it becoming part of Europe's infrastructure?

We'll be back with this question after a short ad break. Hey guys, welcome back from our little ad break. Uh, I'm still talking here with Patrick, uh, founder of Teylor, and we are back with the next set of questions. So I was wondering, is the current wave of fintech consolidation real consolidation, or is it mostly the weak 2021 vintage companies disappearing where the stronger operators survive?

No, I mean, there's certainly an aspect of companies that didn't survive getting bought up. But I do think if you look at the M&A transactions on the market today, these are strong businesses coming together. Even if you ignore Teylor for the time being and you just look at, for example, we had last week announced on the market, or 2 weeks ago, that CRED bought Liberis, for example. And I know that there are other transactions happening.

I think it's the market becoming a little bit mature where in the sense that, you know, people have gotten through this first fintech wave of SME lending. And then seeing obviously it is in some way, shape, or form a scale game and bringing these companies together to kind of boost that scale. And I think that we will see more transactions in the next 12 months where even the bigger, more established players start coming together. So yeah, it's definitely the - now the transactions happening are the strong you know, strong merging with the strong to grow rather than just hoovering up what was left over from that first wave, let's call it.

We talked with creditshelf in the past, we interviewed them. So what made creditshelf, grenke's factoring business, and CapeTec strategically different acquisition targets? Yeah, so each of the transactions we did kind of had different motivations, but we always analyze them through the same framework. And when we look at a deal, we kind of look at 3 criteria.

So number one, Is it a complementary product? So in the sense that either, you know, is it a product that we can use to serve our core customer base, small businesses? We wouldn't buy a business that is, you know, retail lending because that's not our game. That's not what we're focused on.

So is it a complementary product? The second thing that we look at, is it from a geographic perspective relevant for us? It doesn't make sense for me right now to buy or, you know, to buy a player in Vietnam because I don't know, you know, it's not our market. We don't have any strength there.

Maybe someday it will be, but right now it's not on our focus. So geographic is the second thing. And then the third kind of component that we look at is the, is it a good deal for us? Is it there an arbitrage, multiple arbitrage opportunity where maybe in today's weaker market we can buy them cheap and then kind of the multiples will grow naturally over time as the market kind of gets stronger?

Now, all 3 deals kind of fit into these categories. With the creditshelf transaction, you know, it was a great team, a great technology platform, and they were focused same business model as us, but focused on a bit of a bigger customer segment. So we wanted to get access to also SMEs, but just doing a bit bigger, more complicated financings than we were doing. So we wanted to be able to do that.

The Grenke transaction kind of ticked 2 of the boxes. So they're, you know, obviously it's invoice finance, receivables finance, which serves the same customer segment, but is a great product that we wanted to add on there. It's a complementary product. And obviously they're active in multiple European markets, which we wanted to be.

And then CapeTec, the same thing. So it was complementary in the SaaS space and also geographically. So it really made sense for us in that regard. So that's kind of how we look at it.

And the other deals that we hope to do in the future, we always analyze it along those 3 metrics. Talking about your M&A operating system, I was wondering, when a company is under pressure, how do you separate a broken business From a strong asset trapped inside maybe just simply the wrong capital structure? Yeah, it's a very good question. So I mean, I think the advantage that we have because we've been on the market for some time now is that we know most of these businesses.

And usually, you know, being in the market, knowing the people, sometimes there's also like, you know, we have the same customers, for example. You, I think, get relatively good insight into what are the components that work and what are the components that don't work. Nonetheless, it is, you know, a hard due diligence work. You have to go in, you have to analyze it, you have to take that market data, but also the internal data that you get.

And it's also hard in the sense that, you know, you have to take these businesses over. It always takes longer and costs more than you think. You have to cut jobs, you have to restructure and things like that. So for us, it was always that first step was kind of getting that knowledge from the market, having worked with these companies before, and then afterwards having really a dedicated team and a clear kind of post-merger integration process to carve out the parts that we know are valuable and bring it onto our platform.

There's no, how do you say, silver bullet magic secret to do it. It's hard work and a lot of analysis and keeping your ear on the ground, looking at a lot of opportunities. I mean, we get a lot of opportunities every week and we say no to 99% of the things, to be honest. So it's also about being a bit disciplined, I would say.

We've been talking about M&A here, so I was wondering, is Teylor clearly the consolidator in the European non-bank SME lending, or does the same logic eventually make you attractive to a bank, asset manager - think about private equity - or a larger lender? Yeah, certainly. I mean, if I look at the future of Teylor, I, I see kind of 3 3 routes. And obviously, as you can imagine, this is a question that I get asked a lot by VCs and investors and stuff like that.

I mean, for me as Patrick, you know, an entrepreneur, my dream case would obviously - I believe that Teylor has, you know, the strength to stand on its own 2 feet. And I would love to bring it to IPO one day, because I think that this is a great company that could have value on the public markets. The second kind of let's call it exit scenario that I think could be the case is that we get approached by a bank. I think there are a lot of European universal banks who, you know, who we've spoken to in the past and who know us that maybe realize that they've kind of fallen asleep at the wheel in this SME lending space.

And maybe instead of spending €50 million, and I say this in the most loving way, knowing that you guys have worked, you have worked in McKinsey in the past, but instead of spending another €50 million on McKinsey, or Accenture having an SME program number 7 that then doesn't really bring any results. Take that money instead and buy a competitor where you get the, you know, where you have the team, where you have the tech, you have the distribution and things like that. And then the third channel, as you mentioned, or the third option for us, I think would certainly be private equity.

I think that, you know, would be also very interesting knowing especially that a lot of the private equity players have had great success working with platforms like ours in the US. And that a lot of these private equity players are now in the meantime, obviously, multi-asset managers. So they don't just have equities, they all have, you know, private debt funds, senior secured lending funds and stuff like that. So it's for them very attractive as a channel to not just do the equity part, maybe roll up and buy more businesses and grow the equity value, but where they can also deploy debt.

So it's kind of a 2-in-1 for them. So yeah, I mean, my preferred option would obviously be that we're the one buying and and taking the company public and stuff like that. But yeah, looking at the market, those are the 3 realistic options, I think, probably for any lender out there. And if you look at a lot of the players, you know, be it CRED, who's partially owned by Nordic Capital, be it Auxmoney, who's owned by, or partially owned by Centerbridge, I think there is a lot of PE and banking interest in this space once the assets get to a certain size level.

We often have to explain, since we heard internationally, that there's a difference between, uh, how European companies, startups, scale-ups deploy capital and American companies do that. So where does European capital discipline, you personally think, beat American-style hypergrowth, and where does it hold companies back? Oof, that's a great question. I mean, I can certainly say, where does it hold companies back in the sense that just the European capital markets are just much shallower than in the US?

I think, you know, we hear about a lot of different podcasts in the news that in Europe, you do have this funding gap, where kind of, you know, Series Seed and Series A, I think we're very good at in Europe. And then kind of the Series B, if you look at, you know, all of the people raising Series B, they're raising a lot of this if you're raising $20, $30, $40 million, something like that, you raise it from American investors or kind of primarily American investors. So I think we're - Europe as a continent, we are weak in that space, which is certainly a hindrance because it means that, you know, even a company is doing well in the Series A, they have to go to the US to get money, which is a shame for us as Europe because we lose great companies and we lose great, great opportunities for growth that way.

I think that there are You know, obviously also benefits to, you know, us in Europe being a little bit more, more, more, how do you say, less hypergrowth focused and stuff like that. I think that because when there is then maybe a crisis that you're, you know, if you're, let's say your average European growth startup is maybe a little bit closer to being profitable than your average US growth startup, that if something goes wrong, you still have a bit more breathing room to course correct.

But the downside is that we have much less of these billion-dollar unicorns at the end of the day. There's probably more explosions in the US approach to it, but also there's more successes at the end of the day than we have here in Europe. So yeah, I think we have some catching up to do in the European market. I think, though, there's a lot of initiatives happening there.

I think the good thing is that we - of not having this hype is that we don't have things like you've seen right now in the US, this totally overheated market for data center financing, which doesn't happen. It's not happened in Europe just because we have tighter regulatory controls. So there are certainly benefits to this as well in the sense that we don't have these explosions that they have or are kind of having at the moment. So yeah, upsides and downsides, let's say.

That is actually a great bridge to what I want to talk about now, because we are also talking about potential downturns. But let us first talk a little bit about private credit, because private credit is under more scrutiny globally. How structurally different is Teylor's SME and factoring credit from the US software-heavy sponsored-backed private credit exposure now drawing the concerns? Yeah, I mean, I think it's very fundamentally different because if you look at our customer base or our lending book, you know, our average loan size is maybe a couple of hundred thousand euros or in the factoring side, it's maybe a couple of thousand euros even per invoice.

So the portfolios that we're generating are much, much more granular than these data center financing portfolios where maybe you'll have a fund that's got just 10 borrowers in there or 20 or something like that. So you don't have that natural diversification. I think it's important to kind of also, not just - and this isn't just a Europe versus America thing. If you look at the market, for lending, let's just say, generally speaking, if you've got a diversified, even in the US, a diversified portfolio of credit card debt or retail loans or real estate loans, etc.

, those are doing fine. I think it's a very, very specific part of the market that is kind of overheated. This kind of, let's say, AI infrastructure part of the market that is overheated, that is being hit with a very specific problem. But I wouldn't say that it's - or there's no signs for me that there's generally an overheated private credit market.

I think private credit is an extremely relevant part of the financial services industry in the meantime. And yes, there is one part of it that is overheated in one market, but it's still a key asset class, right? And will continue to grow and be a key asset class, especially as we are in a prolonged low interest rate environment almost worldwide. You've been hinting at downturns.

I was wondering, in a real downturn, what happens to a non-bank lender if institutional funding becomes scarcer or even more expensive? Yeah. So there's kind of 2 angles where the problems will arise. So if you are lucky enough that you have already the funding source that's guaranteed for a certain amount of time, you still can feel pressure from obviously your lenders and your refinancing partners to be more risk-off.

So that means that also you then have to go risk-off. off and be more selective in underwriting, which means your growth will certainly stall. Usually the pricing is relatively well locked in. So there's not that much of a pricing impact.

But if you're setting up a new vehicle and you go to market and there's not that many people out there who are willing to fund, you know, your book or anything like that, then the pricing goes up, which in turn makes it more, much more difficult for you to win your clients, right? So there is a pricing effect. I think in terms of downturn, the biggest impact is more indirect in that you know, we've seen, let's take the German market, that you've got a, um, you know, you've got all-time high in terms of insolvencies and stuff like that.

Um, and that just makes it much more difficult to make the book profitable and makes it difficult, um, to find good customers because they have less cash flow, less profits and stuff like that. Um, so even if you do have the lenders that are motivated to do it, if your borrowing base or your customer base is suffering, um, you know, it doesn't help if you've got 20 lenders who are willing to give it. If the underlying customer base is not sound, you have Um, we've been talking about AI before.

I was wondering in that manner, if AI creditworthiness assessment becomes a regulated high-risk activity in Europe, does that either protect the market or does it hand an advantage to scale players that can simply absorb the, the, the compliance costs going with that? I don't think it will change much, to be honest. I think it might make some people more efficient, because - but that's it. Because the reality is, for - I'll give you a concrete example.

For us, whether or not we use, you know, a human being doing 100% of the underwriting, or an AI does the underwriting, the human being just signs it off at the end or anything like that. Every single lender, LP, regulator, whatever that you're working with, they're going to want to have an audit trail for every single credit decision that you make anyway. So we have, for example, in most of our agreements with our partners, they have full audit rights for every single credit decision that we make, meaning that we've had a, you know, we've had, I think the last one was 2 years ago, PwC on behalf of a lender does their annual check.

They come in here and they pick 50 loans and they want to know for these 50 loans, I want to know exactly which documents were used for the underwriting, how was this KPI calculated, et cetera, et cetera. And this is, I think, good governance. It's, you know, you need to have this audit trail for how you made that decision. And I think that if there is more regulation, if it's a high-risk activity, doesn't mean you can't use AI.

It just means you need to have the audit trail to be able to explain why was this decision made. And being able to explain why this decision was made is anyway going to be a prerequisite or is already a prerequisite whether or not you use AI. So I don't think it's going to be a significant difference. I think if they regulate it as a high-risk activity, I can't imagine that there's much more that we would need to do that we're not doing already.

as a serious lender. Although caveat, I would say I hope that they don't because I'm not a big fan of more regulation. I think it doesn't help us that much. And I think the more regulation that we have around AI and things like that, the more we are going to fall behind other markets.

So yeah, that's, but that's my personal opinion, let's say. I would also argue that you need a very good documentation of how an AI makes credit decisions, because you then always can go back and see where did the good decisions and the bad decisions differ. Exactly. Absolutely.

And you need to have this documentation because you need to be able to say, okay, we made this credit decision with this underwriting model, let's call it. And then if you want to have a new one, you need to be able to backtest it and compare and stuff like that. So at the end of the day, it's all about good governance and good, and good tracking all of these decisions. Which I assume that every serious lender already has all of these things in place.

And that's why more, you know, if the regulator were to come to me today and say, show, you know, show me these 5, whatever, 5 credit decisions that you made and why were these made and with which model were they made and explain it to me, we can do that. And we already have to do that for our partners. So the market has already, I think, solved this problem quite well. You guys do a lot in many different areas.

So I was wondering, what is the internal operating system that lets Teylor control risk across lending, factoring, software, institutional funding, and acquisitions? Yeah. So I mean, the biggest benefit that we've had is that we hired about a year and a half ago a new chief operating officer. Veronica, who's brought a lot of structure into the business.

At the end of the day, the way that it works is that we do give a lot of freedom to the local business units, and they all are responsible. They're kind of mini CEOs for whatever their business unit is responsible for. And then we have a centralized entity that kind of has the overall management of the vehicles, management of the overall risk profiles. And then there's obviously hurdle rates where someone can decide something locally, or does it have to get a second sign-off from the group level?

And so, yeah, that's generally how we're structured. The honest answer though, it's not easy. I mean, we - I didn't have as many gray hairs as I do now 7 years ago, and I think a lot of them are due to exactly the question that you're asking and solving those problems. Yeah, I mean, my view on it is like, you know, if it were easy, everyone would be doing it, and I don't think anyone's ever built a great company by doing just the easy way.

And I want to build something big, so, you know, we have to take these challenges and find good solutions for them. good solutions, they usually tied into pretty good predictions. So I was wondering what specific prediction about European SME lending in 2030 are you willing to be judged by later on? I would say 2 predictions.

So I think that the share of private debt in the - or private debt players being active in the - or, you know, the market share of private debt players relative relative to banks is going to grow. And I'm not just specifically talking about SME lending. I'm talking about everything from LBOs to leasing to retail credit, etc. And I think that it will grow in the trillions in the next couple of years in the same way that it has in the US.

And then specifically for SME lending, I think that if we're at 5% market penetration in Germany right now and the UK is at 60%, I think in the next 2, 3 years, or let's say by 2030, I think we'll be not quite at 60% yet, but I think certainly a third of the market will be served by digital lending platforms. That doesn't mean necessarily non-bank lending platforms, but digital lending platforms, surely. We usually end our interviews with 2 questions. One of them is, are you open to talking to investors?

Yeah, I mean, we are actively discussing with investors right now some interesting transactions, and we're always, always on the market and interested to speak to both debt and equity investors. We're not running a specific process, but yeah, we always have these opportunistic discussions and those are sometimes the most interesting ones. For everybody who's interested in this, we'll link your LinkedIn profile down here in the show notes. And last question, are you looking for talented people?

We are always looking for talented people. We're right now Growing a lot or finishing the integrations or closing the integrations of the factoring entities, which means especially in our business in Poland, we're hiring a lot of people, but also we're always looking for talented sales staff. So yeah, always happy to have the right candidates applying. Great.

Patrick, thank you very much. This is Joe from Startuprad.io. Thanks, everyone.