Digital loans (or D-loans) are a type of corporate bank financing (which could also come in the form of credit facilities) for which the price is linked to the company’s degree of digitization. The digital maturity level is determined annually by specialized independent consulting firms after a thorough analysis. If the company improves its level of digitization, the conditions of the bank financing also improve. By doing so, the company aligns its financial instruments with its corporate strategy, and has a financial incentive to improve its degree of digitization and accelerate its digital transformation over time.
A digital loan is an innovative product that has several unique characteristics:
- The purpose of the loan is not a specific “digital” investment. The loan can be used for general corporate needs.
- If the company’s degree of digitalization increases or decreases, the cost of the loan also varies accordingly. In other words, the conditions can either improve or worsen.
- In a syndicated loan of this kind, the digital advisor/coordinator plays a key role, which is independent from the administrative agent role. The digital advisor/coordinator’s role is to help the company select and hire the specialized consulting firm and oversee the analysis, score assignment and drafting of the final report. Together with the company, the digital advisor/coordinator also establishes the price adjustment mechanism based on the company’s digital performance. The digital advisor/coordinator is also responsible for coordinating with other banks and legal advisors in all digital matters of the financing.
The role of the specialized consulting firm
An independent consulting firm, specialized in the digital field, is in charge of conducting a comprehensive analysis of multiple aspects of the company. It will result in a report that includes the company’s degree of digitalization (digital score), which will be used to establish the loan’s financial conditions.
In its analysis, the consulting firm will consider the following aspects: the company’s fundamentals; how it understands digitization; its digitization strategy and planning; its digital innovation; its organizational and technological capabilities; and its operation and execution model, among other issues. Additionally, the consultant will take into account the company’s ability to contact clients, fix prices or customize its services/products based on its digitization efforts. Moreover, the use of artificial intelligence, the data analysis and use, the application of the agile methodology and cybersecurity is also taken into consideration.
Why does this product make sense?
Several internationally renowned studies such as the ones by Boston Consulting Group or McKinsey have demonstrated that companies who undertake a well-designed and rigorous digital transformation are those that know their customers best, adapt more quickly to change, improve their competitiveness and profitability and are therefore expected to be the leaders of their sector over the long-term. It is for this reason that digital transformation is currently on most CEOs’ shoulders.