At the request of our entrepreneurs: repayment in dollars
Written by Michelle Steggerda on 25 October 2022
Until now, loans at PlusPlus were always paid in euros. However, for SMEs in Latin America, that is not the most logical currency. For them, paying in euros often involves extra costs and a lot of hassle with their bank. In this continent, the U.S. dollar is the most common foreign currency. Therefore, to make things a little easier for our Latin American entrepreneurs, PlusPlus now offers a loan with repayment in dollars. We will explain here what that means.
Why in dollars?
Many entrepreneurs in Latin America use the U.S. dollar for their commercial transactions for export. They have a dollar bank account and liquid assets in dollars. With a loan in euros, they run the risk that during the term of the bond, the dollar will lose value against the euro. In that case, they will have to pay back more than budgeted. Moreover, a transaction in euros often involves a great deal of hassle at the bank. That makes it very difficult for our relatively small entrepreneurs. To accommodate them, we now offer these entrepreneurs the option of repaying their PlusPlus loan in U.S. dollars.
How does it work exactly?
Investing in dollar projects is done largely the same way as with all our other projects. The website shows the amount the entrepreneur wants to borrow in EUR and investors transfer their loan in EUR using one of the usual payment options (iDeal, credit card or Bancontact).
When the total loan amount (in EUR) is raised and ready to be transferred to the entrepreneur, a dollar repayment schedule is agreed upon with the entrepreneur. These are amounts in US dollars, which are fixed based on the exchange rate at that time according to the ABN AMRO sell rate. It is also agreed that all exchange costs of the transaction are for the entrepreneur's account. When repayment is due, the entrepreneur transfers the agreed amount in dollars. Then, the amount received is converted to euros and transferred to your wallet.
Exchange rate risk
The main difference with euro payments is that repayments in dollars carry a risk of fluctuating exchange rates. Between the time the dollar repayment schedule is agreed upon and the time a repayment is transferred, the exchange rate of the dollar against the euro may have changed. If the dollar has depreciated against the euro, investors will get back a lower amount than they originally deposited. Conversely, if the dollar has increased in value against the euro, investors will get back a higher amount. In short, there is an exchange rate risk.
That risk, by the way, is always there. But with euro loans, it is the entrepreneur who carries the risk of currency loss. It happens often enough that entrepreneurs must repay more than they received because their local currency has decreased in value. This can sometimes be very unfavorable for entrepreneurs. With a loan repaid in dollars, it is not the entrepreneur but the investor who bears the risk of exchange rate losses. So as an investor, you get to help the entrepreneur even more.
Entrepreneurs in Latin America are very happy that they can now repay their loan in dollars, with the investors taking over the risk of exchange rate fluctuations from them. For investors, it is important to know that they are bearing that risk and that the amount they get back might be a little lower than what they put in. Yet it could also be higher. It can, in short, vary. But for those who truly want to support entrepreneurs, taking over this risk means they make even more of a difference with their investment.