Nowadays, the diversity of ways to obtain financing is colossal. Most investors and companies know what crowdlending is and know the advantages of crowdfactoring and crowdfunding. But this has not always been the case.
Until the late 1990s, the granting of a loan inevitably involved the presence of a bank. They enjoyed a monopoly on these operations, as there were practically no other methods for receiving financing. As a result, access to resources seemed an impossible mission for the actors who were excluded from this system, whose possibilities for investment or financing were greatly reduced.
This impeded the progress of many great ideas, which needed more financial support to land on the market and establish themselves definitively. After all, financing is an essential mechanism for the growth and development of companies.
With the emergence of alternative financing platforms, this situation took a 180-degree turn. The range of possibilities expanded enormously, and the financial system became much more accessible, embracing all kinds of people and initiatives and creating solutions to meet their demands.
Understanding how the new financing methods work is paramount to successfully navigating this new scenario. So let's get down to business: what is crowdlending?
What is crowdlending?
The term crowdlending originates from the combination of two concepts: crowd and lending. In this new form of investment, a series of savers individually finance a certain company through loans, thus avoiding the intermediation of banking institutions.
In exchange for the loan, the investors obtain a profit stipulated by both parties in the contract. And therein lies their profit. In the future, when they recover the initial investment, this will be accompanied by the agreed interest.
Thanks to crowdlending, entrepreneurs no longer depend on the approval of a bank or large lenders to get their projects off the ground. Instead, in the era of people-to-people finance, citizens take on this role, thus promoting the real economy.
This liberalization has a very attractive advantage: instead of conforming to the standard conditions imposed by banks, savers and firms can negotiate the most favourable terms. In this way, they combine the needs of both parties and establish the most appropriate amount, interest rate and repayment period.
This shows that the financial products being developed today are characterized by a degree of unimaginable customization half a century ago.
Reasons for the rise of crowdlending
After knowing what crowdlending is, we must situate ourselves contextually to understand the circumstances that led to its expansion. To do so, it is necessary to go back to the beginning of the century.
To begin with, its growth could not be explained without the irruption of the Internet. To participate in crowdlending, it is only necessary to have a device with an Internet connection since these transactions are carried out online. During the 2000s, the first smartphones were launched, and the Internet became an immense democratization, occupying a central place in our lives.
At the end of that decade, one of the biggest economic crises in history took place. 2008 was a disastrous year for banks, whose reputations plummeted, and they lost a lot of credibility in the eyes of the public. As a result, the public stopped trusting them to invest their wealth and began looking for alternative financing.
Finally, to understand what crowdlending is, we must pay attention to the collaborative economy, a real trend today. This phenomenon rejects the traditional company-client view and advocates the exchange or purchase of goods and services between individuals who are brought into contact with each other through new technologies.
The actors involved in crowdlending
Those interested in this alternative financing method should not only know what crowdlending is. They also need to identify the actors involved in any crowdlending operation to know which category they fall into.
- Lender: the saver who advances the money to the company assumes the role of lender. He is motivated by the economic return he will receive in the future, derived from his interest in the operation. Investors seek to multiply their wealth, but, at the same time, they do not pursue mere economic return. They also wish to generate a positive impact on their environment through their capital, and to this end, they support nascent projects in need of wings.
- Borrower: this is the company that seeks financing to either pay off its suppliers' debts or launch its initiatives. To achieve this, it turns to small savers, who provide it with this liquidity. When the established term ends, it must repay them the amount originally lent, paying interest and commissions.
- Intermediary: the presence of a third party is necessary to put the lender and the borrower in contact. And investment platforms belonging to the Fintech sector take on this role. Thanks to the potential of technologies, they create a space where users register and finance those businesses aligned with their interests, constituting a sort of online marketplace. These platforms charge commissions for the services rendered, which are passed on to the company that needs financing.
Benefits of crowdlending
Crowdlending was created to solve the problems presented by traditional financing methods for individuals wishing to invest and for organizations in need of resources.
To begin with, it allows diversification of the saver's investment portfolio. This is wise, as it considerably reduces their risk of incurring losses. For example, if your investments are highly concentrated and one of the projects you have invested in your capital is not profitable, you will lose a larger sum of money. On the other hand, if you have evenly distributed your assets, the debacle of one company will not have such a significant impact on your portfolio, as the rest will cushion it.
This formula's deep customization helps you find companies that meet your demands. Thus, you can invest in initiatives that offer higher returns or those with more moderate risk. Generally, crowdlending terms are usually short, so you quickly recover your investment and obtain liquidity.
Many of the crowdlending platforms value the ethical aspect of the companies. In this way, the investor obtains the satisfaction of allocating capital to sustainable projects. And the high transparency of this mechanism based on ethical investment allows them to see firsthand the positive impact their assets are generating in the community and on the planet.
But it is impossible to understand what crowdlending is without looking at the advantages it offers firms. First, the processing of transactions is quicker and simpler than in banking. Therefore, organizations that urgently need liquidity can quickly get their hands on the money. In addition, they do not depend on a single source of credit but rely on a multitude of investors. And because they have greater flexibility in determining the contract terms, the interest they pay can also be lower.
Types of crowdlending
There are two main crowdlending types depending on the borrower's nature: P2B crowdlending and P2P crowdlending.
- Peer-to-peer crowdlending: in this type of crowdlending, the beneficiary of the loan is a person, who seeks help to finance personal projects such as, for example, his or her studies. P2P crowdlending connects individuals with individuals and is characterized by higher profitability, as the risk is usually somewhat higher.
- Peer-to-business crowdlending: in this case, individuals finance companies or SMEs incorporated in the form of a company. As the risk is lower, the operation's profitability is also lower. There is a subtype of P2B crowdlending, called real estate crowdlending, through which savers provide financing to a developer engaged in the construction and sale of real estate.
Legislative measures have been taken to regulate this investment mechanism and reduce investors' risk. This is where Law 5/2015 on the promotion of business financing comes into play, impacting participatory financing platforms.
To protect small savers, a difference is established between accredited investors (those more professional, who have no investment limit) and non-accredited investors (whose investment is limited to €3,000 per project and €10,000 in the last twelve months).
In addition, to mitigate the risk of inability to pay by the businesses, the law limits the amount of money they can raise through the platforms to 2 million euros, this figure rising to 5 million if they target accredited investors.
Differences between crowdfunding and crowdfactoring
Crowdlending was born as a result of crowdfunding, another mechanism in which projects are financed through individuals. With a more social or cultural character, this formula does not ensure interest for the lender, whose contribution is considered a kind of donation. The saver is not motivated by economic profit, but his sole objective is to give wings to the initiative. However, to attract investment, the company can offer a small part of its capital, thus giving rise to crowdfunding equity.
Crowdfactoring, on the other hand, allows companies to finance their invoices, anticipating the collection of these to have liquidity at crucial moments. In exchange for advancing this amount of money, investors receive a small interest. As crowdfactoring works in the short term, it does not take long for investors to receive a return on their investment.
In recent years, many platforms specialized in crowdfunding, crowdlending or crowdfactoring have been developed. Their work is fundamental because, without their intermediation, the search for sustainable projects on the part of savers would be more complex. Likewise, businesses would find it more difficult to find new sources of financing.
Inversa Invoice Market is one of them. The crowdfactoring platform was born with the spirit of boosting the real economy, convinced of the ability of financing to bring about positive change in society and the planet. More than 2,400 initiatives have benefited from its online invoice marketplace.