Crowdlending: Everything you always wanted to know but never dared to ask

The figure of the loan has been part of our lives since the dawn of civilization. It is enough to open a Roman Law manual to prove it. Or see one of Shakespeare's most famous plays, The Merchant of Venice, performed in the theater. Thus, lending has been a key element of the economic system for centuries. And it will remain so in the future, thanks in large part to crowdlending. This form of online alternative financing allows businesses and individuals to obtain loans without having to confine themselves to the traditional financial system. At the same time, it opens up new ways for investors of all kinds to get a return on their money, including small savers. Thus, crowdlending uses the latest technology to digitize the classic loan and, at the same time, revolutionize the financial system, making it more accessible to both companies and investors.

1. What is crowdlending?

Let's get down to the nitty-gritty, what exactly is crowdlending? It is a type of alternative financing that, as its name suggests, combines two concepts: lending and crowd. To these, we should add the notion of online to obtain a precise overview of the basic pillars of crowdlending.

1.1. Crowd of investors

In the past, the financial system was made up of a large number of banks and credit institutions. A few decades ago, almost every Spanish province had its own savings bank and the banking ecosystem was made up of numerous private banks of modest size. However, this has changed radically in recent years, especially in the wake of the 2008 financial crisis. The mergers of institutions and the bankarization of savings banks led to a reduction in the number of players in the traditional banking system and, consequently, in supply. Thus, businesses and individuals could only contract loans with a limited number of entities that, in turn, offer similar products. Crowdlending platforms, on the other hand, are based on a wide range of investors. Anyone who meets the requirements can invest their savings in financing companies and individuals.

1.2. Participatory loans with ethical values

Precisely, the multiplicity of investors means that, unlike traditional loans, crowdlending loans are collaborative or participatory. In such a way that multiple investors can finance a project. Moreover, as savers can freely select the company to which they lend their money, crowdlending becomes a tool of extraordinary value in the service of ethical investment.

1.3. Platforms and marketplaces

The traditional banking sector's monopoly on the financing market was largely due to the impossibility of launching projects in which companies in the real economy that need liquidity and savers who want to make the most of their money could connect directly. Digitalization has put an end to this situation. Thus, innovative platforms such as Inversa Invoice Market allow investors and businesses to access alternative financing services and products such as crowdlending loans autonomously and independently. It is enough to have a device connected to the internet to access these marketplaces and apply for financing or select the project in which you want to invest. Because of what we have just explained, we can see that crowdlending platforms become facilitators of investment and lending, making their technological developments available to individuals and businesses to facilitate the marketing of financial products and the economic management linked to them.

2. Which players are involved?

At this point, it seems clear that when talking about crowdlending we have to focus on three types of key players, all three of which are essential for the implementation and success of this type of online alternative financing.

2.1. Companies and individuals in need of liquidity

For a loan to exist, there must first be a need for money on the part of a person or business. Thus, as with traditional loans, the most important thing in crowdlending is that a company or individual needs or wants to obtain liquidity and is willing to pay the interest associated with the loan. Borrowers obtain the money they are looking for, in exchange for repaying it within the agreed terms and paying interest to the investors and management fees to the crowdlending platform.

2.2. Investors

If in the first place there must be an actor willing to obtain money by taking out a loan, secondly, it is a sine qua non requirement that, on the other side, there must be an investor willing to lend money. Alternative financing in general and crowdlending in particular have opened the doors to thousands of investors who can contribute to financing real economy projects and obtain a return for it. As opposed to the investor who limited himself to establishing the amount of money he wished to invest and left the entire investment process in the hands of a bank manager, crowdlending empowers investors who can fully inform themselves of the different projects that request a loan and decide in which one they invest their money. Taking into account the profitability, the repayment term, and, of course, the purpose of the money to be invested.

2.3. FinTech

Companies and individuals in need of liquidity and investors willing to finance them need a framework in which to enter into and manage their economic relationships. This framework is made up of marketplaces or online alternative financing platforms designed, implemented, and governed by FinTechs. FinTechs, as their name suggests, merge the field of financing with the technology sector to develop innovative solutions that facilitate the marketing of financial products and services. Fintechs are not replacing banks, nor playing the same role as them, but are cutting-edge companies based on a solid technological foundation whose mission is to expand the financing ecosystem and open up new ways for businesses to obtain liquidity and for investors to make their savings profitable.

3. Five benefits of crowdlending

All these issues that we have just explored have a very clear direct consequence: crowdlending does not work in the same way as classic bank lending. And, therefore, it has the same benefits, neither for individuals or companies seeking to obtain liquidity nor for the investors who finance them through loans.

3.1. Agility

Banks are large organizations with bureaucratic procedures that are often too slow for companies that need to obtain financing in the short term. On the other hand, crowdlending platforms, thanks to their cutting-edge solutions, can speed up all the procedures, both for companies in need of liquidity and investors. In just a few days a company can apply for a loan, including all the necessary documentation, undergo a viability assessment, and be listed on the Marketplace so that investors can decide to finance it. Financial procedures have never been more agile.

3.2. Speed

The reduction of deadlines and formalities helps to increase the speed with which companies and individuals can obtain the liquidity they are looking for. But it also reduces the time investors have to wait to recover their investment and, above all, to pay interest on loans. In a market where changes are occurring at extremely high speed, companies and investors need to be able to arrange alternative financing products online very quickly. Today, more than ever, time is money.

3.3. Diversification

As we always remember, online alternative financing is not intended to replace the traditional financial system, but to complement it. Thus, crowdlending platforms represent a diversification of the financing ecosystem. In this way, companies can diversify their sources of financing. Since they can contract banking products or services, but also resort to crowdlending or other forms of online alternative financing to obtain liquidity. Investors can also diversify the types of investment products they purchase (loans, investments, etc.) and the players in which they invest. For example, a saver who wishes to invest in projects focused on the environment and sustainability, but also in biotech companies, can decide to spread the money he or she is going to invest in different projects.

3.4. Freedom

The ability to make decisions is another fundamental benefit of crowdlending in particular and alternative online financing in general. Companies and individuals who need to obtain liquidity have greater freedom to select the product or modality that best suits their characteristics and needs. Thanks to crowdlending platforms, they no longer have to resort solely and exclusively to banks to obtain loans with which to obtain liquidity. What's more, the variety of crowdlending modalities makes it easier for businesses and individuals to obtain short-term, but also medium, or long-term financing. Every organization is different and financial products must be able to adapt to the infinite casuistry of the market. While investors enjoy total freedom in selecting which businesses or individuals they finance by lending money to. This allows ethical investment to gain ground in our financial sector and allows investors to make an impact on the real economy and society with their savings.

3.5. Transparency

This benefit is one of the key features of crowdlending platforms. Everything is managed with absolute transparency. Both borrowers and lenders know at all times the conditions of the product, know exactly the characteristics of the other parties, and can track the status of each operation. All this is possible thanks to the design of the marketplaces, which facilitate the active participation of all the users involved and the agile and simple consultation of the information.

4. Types of crowdlending

As we have already pointed out, crowdlending is not a rigid and monolithic entity but encompasses different typologies depending on who or what is being financed.

4.1. Loans to companies

Business loans are a growing type of crowdlending and are known as P2B crowdlending, i.e. peer to business. These collaborative loans enable savers to finance business projects by granting a loan. Investors have at their disposal all the financial information about the loan applicant and know where their money is going to go. P2B crowdlending is key for many companies that need to obtain liquidity to grow and consolidate.

4.2. Lending to individuals

Loans to individuals or P2P (peer-to-peer) crowdlending are less common than P2B since the risk of the operation is higher. The financial analysis of a company and its ability to repay a loan generates less uncertainty than that of an individual. However, P2P crowdlending can be interesting for savers who want to obtain a high return in a short period. Some people resort to this type of crowdlending to finance personal projects such as, for example, the completion of studies that, in the long run, will allow them to make a return on their investment.

4.3. Real estate loans

Real estate crowdlending consists of lending money to finance an operation such as the purchase, construction, or renovation of a property.

5. Crowdfactoring: From loan to advance payment

Is crowdfactoring a type of crowdlending? The relationship between the two is complex since in crowdfactoring there is no loan as in the three types of crowdlending we have just discussed. In other words, no borrower has to pay back the money to a lender. Rather, a business becomes a transferor by transferring to the investor the collection rights on an invoice it has issued but not yet collected. In return, the saver advances the business in the amount of that invoice. This means that it is not the transferor who returns the saver's investment to the saver, but the recipient of the invoice. Thus, as far as crowdfactoring is concerned, to the three crowdlending actors we talked about before: companies in need of liquidity, investors, and FinTech it is necessary to add a fourth type of actor: the business that must pay the invoice issued by the transferor. All this implies that:

• The investor finances a business by advancing the amount of an invoice. For this, he gets some interest.
• The business obtains the liquidity it seeks and, in return, has to pay interest to the investor and commissions to the crowdfactoring platform.
• The recipient of the invoice must pay it when it is due. In such a way that the saver recovers the investment made.
• The crowdfactoring platform, such as Inversa Invoice Market, provides the actors involved with its technological development and all the information available and within their reach to facilitate the operation. In essence, we could say that these are information services for both investors and transferors. These platforms put both parties in contact with each other.

In short, crowdlending and crowdfactoring are alternative online financing methods that allow real economy businesses to obtain the liquidity they need in a short period and savers to make their money profitable by investing it ethically.