Steering safely through storms / Evergreen Capital

With the first signs of spring, we visited our Estonia-based partner – company Evergreen Capital to find out more about how this small and medium enterprises (SME) financer company is doing over the global economy roller-coaster.

We met with Kristjan Tolmats, co-founder of Evergreen Capital.

Debitum: Hi, Kristjan! Before we jump into the current performance of the company, please tell how Evergreen story started.

Kristjan: Before Evergreen all my professional life was related to the finance industry. I was working as a trader on the stock market and later in a bank.

One of my university mates, Magnus at that time had started a technology company and we decided to unite our financial and IT knowledge and skills and start a new business.

That’s how 10 years ago Evergreen was created.

We started really small. In the beginning, we were using our own funding and helping people in our own network to launch and finance their businesses. With time we got better, started to expand, and financed good SMEs that couldn’t get funding from traditional banks.

Today we have financed more than 3 000 business deals (issued loans) with a total amount of around 30 million euros.

Debitum: Are there some specific business niches Evergreen focuses on?

Kristjan: We don’t restrict ourselves too much, but let’s just say that the nature of the whole economy in general forces us basically to lend money into certain niches – construction, transportation, entertainment businesses, and also e-commerce. This is where most of the economic activity is taking place.

Debitum: Ten years since day one have passed. What are the key characteristics of the current business?

Kristjan: In Estonia, there are around 75 000 SMEs, and we are servicing more than 1% of the market. Currently, we have about 1000 customers with an average loan of 5000 Euros, and a lot of them have an active loan with us. The rest of our client base is “jumping in and out” the moment they need funding.

It means these are not one-time deals. Long-term relationships are our way to go (and I suggest every company stick to this strategy). First, it gives the company the opportunity to build trust with clients, but also it is more profitable.

Debitum: What is your customer life time value?

Kristjan: There are many customers that are with us for the last six years. And by that, I don’t mean they have been financed six years ago and now repaying this first loan. It means they have got the first funding, paid it back and returned for the next financing round, repaid, and after some time returned again.

I think even though we are working actively with SMEs for the last 6 years, it’s still too early to make precise Customer life cycle and LTV (lifetime value) calculations. It highlights long-term relations with customers and thus the health of the business as such.

Debitum: Is it a potential threat for the business to know customers almost on a personal level?

Kristjan: Yes of course I know some customers better than others. Especially if the company has been financed for many years. But at the same time, our relationships are strictly professional. We have a duty not only to our customers but also to our investors, employees, and our creditors.

If we track signs that the loan goes bad, we move quickly. For example, if we understand that the company’s cash flow problems are temporary, we can offer various solutions to the situation. But once we decide that the situation is not solvable anymore, we move on to the debt collection process.

Debitum: Estonia is the so-called E-country. Are there some advantages to running such a business in Estonia?

Kristjan: Yes, I think the environment in Estonia is probably one of the best to run this kind of business.

Firstly, in every business, but especially in the finance industry, everything starts with having the Rule of Law in the market you are operating in. It means you can be sure of the result of what happens if you give out the loan. You can be quite sure that the contracts are valid and enforceable, and you can be absolutely sure about the outcome of the process (if the loan is “problematic”) including the court.

So, the Rule of Law means that everybody can trust each other more. Trust enables things to be done fast and smoothly and, in a way lower risk.

And secondly, an advanced e-economy also means that everything is done quickly and without having to meet face-to-face too many times. The digital signatures save time. Also, all kinds of government proceedings are done in a very quick and efficient way.

The outcome – everybody can focus on their own business without having to worry too much about bureaucracy and the risk of fraud.

Debitum: Let’s look into 2022, which was challenging for many companies. How was this year for Evergreen?

Kristjan: The year 2022 was as expected. It wasn’t our best year because it wasn’t the best year for our customers, but overall results were good. Our profit even grew from 190 thousand to a little over 200 thousand euros as the size of our overall portfolio grew.

The foundations of our current performance have been built two, three years ago when we set prudent customer selection and financing rules. We have followed these rules over the years and today we can see the result.

Debitum: Does it mean customer quality has been more important than the ultimate growth of the business?

Kristjan: We haven’t tried to grow for the sake of growth itself. For many businesses, this has been the goal, and it is like a hot topic, but we have a primary focus on the quality of the portfolio. And only then do we add the angle of growth. By doing this we are keeping the optimal balance between growth and portfolio quality.

The tradeoff is – when everybody was doing well and growing their market shares and portfolios, we didn’t grow that fast. But now in turbulent times, Evergreen has higher quality companies and higher quality loans in the portfolio. That’s why we are doing well throughout the crisis. Small is beautiful.

Debitum: But as you said, 2022 wasn’t easy for your clients…

Kristjan: Of course, due to the crisis, we’ve been more cautious. We have made our lending requirements stricter and made more provisions for bad loans. For example, we have eliminated the bottom quarter of customers (quality-wise) to avoid “bad funding”. The other approach used is to manage risks through the sizing of the average loan issued. We keep servicing customers but offer them less money on average.

Debitum: Sounds like Evergreen is doing responsible (or sustainable) lending?

Kristjan: If a company grows its portfolio only for the sake of growth, then, in the end, the company might make the world a worse place.

By that I mean, if you lend money to companies that don’t know how to use the funds or to make any good with it, or to individuals who don’t know how to pay back then you’re making the overall economy worse.

Yes, we are not growing as quickly as we might, but at the same time, we are taking less risk as well. For me, it’s definitely about the returns, but about risk-adjusted returns. I want to be aware of the risk we are taking to make a certain amount of profit. And we can be quite sure that if the world is still here, then we are also here in 10- and 20- years’ time.

Debitum: Ok, then what is the core idea behind Evergreen?

Kristjan: The simple idea behind Evergreen is – each loan we give out must be a productive one.

Lending as such is a good thing. Having credit in the economic system is one of the things that has brought us humans here over the past few thousand years. But lending money can also be a bad thing. If you do it without thinking and with a bad policy, it’s bad for everybody. So, making sure that each loan is productive is the best approach for everyone – us as a lending company, the borrower, surely the investors, and the overall economy.

Debitum: Is there something your clients and Debitum investors can expect to see this year and onwards?

Kristjan: One of the big things we are working on is our IT systems updates. We are always looking for ways to improve the service to our customers – quicker loan applications and more smooth customer experience. In the very end, it will give us more opportunities to gain better insights into the situation behind our client’s business and to continue to build long-term relations.

Most importantly, you can expect us to keep steering the ship that is Evergreen Capital safely through these stormy times and keep our investor’s funds safe and secure.

More about Evergreen Capital increased rate offer find out here

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