Crowdfunding versus Crowdlending

Published on 10. December 2018
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The power of the crowd: crowdinvesting vs. crowdlending

There seems to be a vast ocean between donations and investing. Yet, at the same time, crowdlending and crowinvesting have a lot in common. In this article, we’ll explore what exactly is crowdlending and crowdinvesting and how they both benefit from the power of the masses. 

Small input, big impact. Crowdinvesting, just like crowdfunding, relies on a large number of investors, some of which, invest very small amounts of money on a specific project. Crowdinvesting, however, focuses on returns. When it comes to “crowdinvesting”, the investors no longer “donates” their money. They rather invest and in return, they are promised an interest rate. There's also the the hope that a major investors will take over their project later and buy the shares for a hefty premium.

A prime example of a successful crowdfunding campaign is the florist start-up, Bloomy Days. The Berlin-based start-up invented the first flower service subscription worldwide and collected £150,000 in a matter of minutes. When a major investor entered Bloomy Days, the small investors got their shares back with a return of 30 percent.

There are also examples where the risk was not as successful. A prime example of crowdfunding bankruptcies is seen with Protonet, a start-up which provides a cloud-based social project management and collaboration platform. Unfortunately, Protonet had to file for bankruptcy in 2017. Just like every type of investment that contains an element of risk, crowdfunding can be both a very profitable or volatile business.


Always read the fine print...

It helps to take a closer look at the website and the respective investment information sheet. Detailed information is available in prospectuses, however, most crowdfunding projects are not prospectus-aware. The threshold for the preparation of a securities prospectus is set at 8 million Euros, according to the EU Securities Prospectus Regulation. The Small Investor Protection Act, which came into force in 2015, gives crowd investments a legal framework. Often crowd investments are called subordinated loans and belong to the grey capital market. In the event that a company declares bankruptcy, investors are waiting in the queue, so to speak.

The terms of the loans vary by industry and platform and can range from two to eight years. In addition to interest and profit sharing, some of the crowd investments offer another bonus: investing in environmental projects, for example. The crowdinvesting platform Seedrs, which is available on Fidor's digital marketplace, offers the possibility to invest in diversified portfolios.

 

Crowdinvesting – the good and the bad

Pros

Cons

Easy access to new asset classes

No possibility of termination during the process

Low minimum investment

Possibility of a complete loss on already made investments

 

Crowdinvesting allows you to stay close to the projects you invest in. You can follow directly what your money is used for. In addition, you will be offered a wide range of projects: from the biotech startup to the medium-sized chocolate traditional company on the citizen solar system is all there. It's up to you to decide on your own whether the project you are investing in promises success and is managed seriously. Do not just run after the "crowd"!

For example, if you invest in real estate, you have the prospect of particularly high returns, but you should keep in mind that crowdfunding risks losing the entire investment. The legislator prescribes the following warning for crowd investments: "The acquisition of this asset entails considerable risks and can lead to the complete loss of the invested assets." So, use only the money sparingingly in case of emergency!

 

Crowdlending / Peer-to-Peer-Lending

Crowdlending, also referred to as peer-to-peer lending, brings beneficiaries and creditors together through an auction-like process. On a crowdlending marketplace, private creditors find interesting projects and beneficiaries and vice versa.

Crowdlending is about connecting private investors with people looking for investors or companies looking for investors. 

 

Market growth of 95 percent

According to a survey conducted by the German Federal Ministry of Finance (BMF), the crowdfunding loans in 2015 were totalling around 189 million for private individuals and companies in Germany. The market is growing rapidly: since 2007, annual market growth has averaged 95 percent, according to the BMF. 

 

Crowdlending-Checks

The sponsor receives information about who gets his money and knows exactly what he or she intends to do with the money. The platforms publish interest rates and fees for each individual loan project. Information on financial data of companies or persons applying for credit on the platform can also be found. 

Pros

Cons

A minimum investment amount

The possibility of large losses  

Promise of high return on investment

The crowdlending platforms don’t assume any liabilities

 

When talking about crowdlending, we need to keep in mind that there are small minimum investment amounts. It’s often possible to become involved in a project by investing 25 pounds. The small amounts make it possible to invest in a broad portfolio and spread out the risk.

However, if the beneficiary files a personal bankruptcy or the beneficiary company becomes insolvent, the loan may be cancelled. Insufficient bankruptcy assets equal a total loss. Since crowdlending platforms don’t assume any liability and the deposit guarantee fund of the banks do not intervene, you should be aware of the risks involved at each stage.

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