How do crowdlending platforms work?

Good ideas are not enough to change the world. But, of course, they are one of indispensable pillars of progress. But without financial support to turn them into reality, they are just that: ideas. Fortunately, more and more mechanisms provide people with the resources they need to get their projects off the ground. And crowdlending platforms are one of the most effective.

There are a large number of initiatives in search of funding to be able to make the final leap to the market. For some, banks have not granted them a sufficiently generous loan. Others want to break away from conventional financial institutions and diversify their financing channels.

At the same time, the number of people who want to break away from traditional investment channels is also increasing. And many of them are financing small businesses, either because they offer a higher return than other options or because they are convinced of their growth potential and want to be part of it.

But what are crowdlending platforms really, how do they work, and are they recommended for everyone?

What is crowdlending?

It is impossible to understand crowdlending platforms without understanding what crowdlending is. This alternative financing system allows companies to obtain financing thanks to the sum of individual contributions from a group of people who grant a loan in exchange for interest.

Its mechanics are very similar to those of bank loans. The difference is that, in this case, it does not depend exclusively on a single source to obtain resources. If the organization depended only on the bank, it could falter if it withdrew its support. But if a saver backs out, the firm can cushion this loss by relying on other investors.

The name itself is very revealing. The term comes from English and combines the concepts of crowd and lending.

All operations of this nature involve three actors: the investor (the saver who acts as a lender and will obtain a profit in exchange for his investment), the company (the company that acts as a borrower and resorts to this method to obtain liquidity) and the crowdlending platforms (they are the intermediaries between both actors, they are part of the Fintech sector and usually charge a commission in exchange for their services).

Crowdlending caused an unprecedented liberalization in the financial ecosystem. In the past, banks acted as gatekeepers, deciding which initiatives enjoyed their support. Generally, only those that got their approval were allowed to prosper.

The emergence of new alternative financing systems completely broke down these barriers to entry, democratizing the world of finance and making it more accessible to all players.

Moreover, with this mechanism, both parties enjoy more freedom to determine the terms of contracts. For example, when contracting a financial product with a bank, the possibilities for negotiation are rather limited. But the wide variety of projects that use crowdlending platforms is key for investors to find an option that seems tailor-made.

Thanks to crowdlending platforms, companies can obtain resources and not jeopardize their financial stability

How crowdlending platforms work

Crowdlending platforms work as intermediaries. They are online channels through which savers and organizations can contact each other to find someone to meet their investment or financing needs, respectively.

These platforms work with P2B (peer-to-business) crowdlending, a form of crowdlending in which individuals finance businesses. However, there is another type of crowdlending: P2P (or peer-to-peer), in which projects are financed by individuals who are not incorporated in the form of a commercial company.

But how to invest in crowdlending platforms?

The first step is to investigate all the available options to select the right platform. There are many alternatives on the market, and not all offer the same conditions, so it is necessary to find the one that best suits the investor’s circumstances, paying attention to aspects such as its reputation or the opinions of other users.

The next step is to register with the chosen platform. To do this, it is sufficient to have a device with an internet connection. Most crowdlending platforms operate online, so the registration and investment process is extremely simple and agile.

Once the profile is active, it is essential to determine the amount injected into the project. Will it be a modest amount or a higher volume of money? On alternative financing platforms such as Inversa, it is possible to start financing invoices with an investment of as little as twenty euros.

Now it’s time to search through all the companies looking for financing until you find one that meets the savers’ requirements. To find the most suitable initiative in the catalog, it is necessary to analyze the amount of money requested, the interest rate at which it will benefit investors, the period needed to repay the original amount and the values that characterize it.

Inversa, for example, focuses on businesses with a very strong ethical component. Thus, it is an ideal alternative for those savers who seek to multiply their wealth and wish to contribute their grain of sand to build a better world.

Finally, the saver confirms the operation and simply waits for the return on his investment, while his contribution enables the company to implement its ideas.

Minimizing risks through crowdlending

In recent years, crowdlending platforms have gained formidable popularity, with more and more people joining their ranks with each passing day.

This growing social support is mainly because many play on shorter terms than traditional alternatives. Then, savers were forced to wait months or years to see their investments grow. Today, some crowdlending platforms ensure a profit after a few weeks, and people enjoy the profits sooner.

Moreover, these channels’ high transparency makes it possible for investors to follow the course of their money easily. In this way, they can see firsthand their capital’s positive impact on the world, resulting in priceless satisfaction.

However, no financial decision should be taken lightly. There is always a certain amount of risk involved, so they must be weighed carefully.

Earlier, we talked about the importance of diversifying organizations’ financing channels. But crowdlending also hides a great capacity to diversify the investment portfolio of savers.

This method is extremely effective in minimizing the risk they face. For example, if one of the companies in which they have invested goes bankrupt, they will be able to cushion the loss with the rest of their investments, and they will hardly notice the effect. But if they distribute all their capital between one or two firms, the debacle of one could cause serious problems for their financial health.

In this way, crowdlending platforms are an effective formula for obtaining short-term liquidity and help reduce the risk inherent in financial operations. Both for investors and companies.

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