The emergence of new financing methods is a real driving force for the progress of society. The wider the range of sources to which a company can turn for resources, the more likely it is to find an investor to support it financially. Businesses must therefore succeed in this nascent entrepreneurial context. It is, therefore, vital to understand the difference between crowdlending and crowdfunding.
With crowdfunding, projects are financed through the individual contributions of a group of people. Each makes small contributions, and the sum of all of them allows the creator to put his ideas into action. The term comes from English and is formed by crowd (crowd) and funding (funding). In Spanish, it is known as micropatronage and is widely used to promote cultural, political or social projects, especially those related to ethical investment.
This is not a rigid formula; there are four main types of crowdfunding. Two involve an economic benefit, and the other two have a more disinterested character. Thus, all entities searching for resources can find a modality that suits their needs.
- Donation crowdfunding: there is no profit motive, the person who contributes the money does not receive or expect to receive anything in return. Their contribution is selfless and is generally due to factors such as solidarity or personal interest in seeing the project grow.
- Reward crowdfunding: in this variant, the financial support of the backers is rewarded by including their name in the credits or in the acknowledgments of the product or service developed. The sending of gifts to encourage support also falls into this category. These increase or decrease in value depending on the amount contributed by the investor.
- Investment crowdfunding or crowdfunding equity: to attract investors, a small part of the company's capital is given to them. Here there is already an economic benefit, but it is conditioned to the profitability and success of the firm. If the project is successful and profitable, the investors will receive a percentage, which will be higher the higher their contribution. If, on the other hand, the business suffers losses and does not survive in the market, they will be left empty-handed.
- Crowdfunding of loans or crowdlending: this category is radically different from the previous ones, so it receives its own name. Here, the company is obliged to return the money. There is no longer a donation but a loan with interest. The investor seeks to multiply his capital, although, in the process, he decides to support sustainable initiatives.
The similarities between crowdlending and crowdfunding
These two crowdfunding methods are very popular alternatives to traditional bank loans. While organizations that turn to banks only have that channel to obtain resources, those that bet on crowdlending or crowdfunding diversify their funding sources. Thus, if one of them withdraws support, they can cushion the impact thanks to the others.
They have also made the world of finance much more accessible. In the past, if banks refused to grant a loan, the remaining possibilities available to companies were practically nil. Now, they enjoy a wide range of options and can choose the one that benefits them the most.
Some crowdfunding modalities do not require the return of the money, which opens the door to initiatives of a more social nature that do not pursue a mere economic return. In the past, many of these projects were excluded from the financial system. Crowdlending and crowdfunding gave them the necessary visibility and indirectly helped them generate positive change in the world.
Over the last few years, both formulas have experienced tremendous growth. The emergence of the Internet was mainly responsible for their expansion since it is only necessary to have a device with a connection to participate in them. Their high degree of simplicity is another of their main attractions: anyone can register on an online alternative financing platform to invest their assets or request resources quickly.
Profitability, the main difference between crowdlending and crowdfunding
The main difference between crowdlending and crowdfunding lies in the existence of profitability. In donation and reward crowdfunding, the investor receives no economic benefit, so the profitability is null.
The saver can obtain a certain return in equity crowdfunding, but without guarantee. If the project in which he has invested succeeds, he will participate in that success and receive the corresponding percentage of his capital. If the project is not viable, he will not make any profit. Everything depends on the company's success. And the investor will not be able to claim anything from you.
On the other hand, crowdlending implies an economic benefit, regardless of the company's viability. Once the loan repayment period is over, the investor will receive his money back and benefit from the operation's interest. Moreover, if the organization does not reimburse the stipulated amount in full, the investor can demand the reimbursement of the debt since a contract covers it.
The risk of losing the investment is another difference between crowdlending and crowdfunding. In crowdfunding, the loss of money is guaranteed. But the saver agrees to it because he wants to give wings to the project in which he invests.
In equity crowdfunding, losing the original amount is also inevitable, although the investor hopes to recover a certain portion. Although it depends on the specific circumstances of the sector and the company, the risk of this model remains high.
Crowdlending has a lower risk of loss, as it involves the repayment of the loan and the interest payment. However, it may be the case that the firm that requested the resources cannot pay the debt and becomes insolvent, so the risk never disappears completely.
Other differences between crowdlending and crowdfunding
What is the intention of the saver financing the company? Here lies another difference between crowdlending and crowdfunding. After all, not everyone gives their money for the same purpose. In the case of crowdfunding, the investor is directly committed to the project. He wants it to be successful and viable in the long term and to see it grow and establish itself in the market.
In crowdlending, the person who provides financing pursues short-term profitability and seeks to multiply his capital. There is not such a personal and disinterested involvement, but aspects such as solvency and economic gain.
There is another difference between crowdlending and crowdfunding, which is closely related to the investor. And that is the degree of professionalism. Crowdlending is characterized by a higher profitability level, attracting more professional profiles. However, the people who participate in crowdfunding are not professionally engaged in it. They are usually ordinary citizens, sensitive to the cause or close to the project's creators.
The last difference between crowdlending and crowdfunding is the security of these mechanisms. While crowdlending tries to provide guarantees to encourage investment, equity crowdfunding moves away from certainties, as it does not ensure profit at any time.
It is important to keep in mind that there are no good or bad options when talking about alternative financing methods. Instead, there are more or less suitable options. And the choice will be determined by the circumstances and objectives of each investor or company. For these reasons, it is essential to understand crowdfunding or what crowdlending is and to know their common points and differences in depth.