What is crowdfactoring: definition, operation and advantages

Understanding what crowdfactoring is allows investors to broaden the range of options into which to inject their capital for a return

“Great things in business are never done by one person; they are done by a group of people,” said Steve Jobs, one of the great minds of the 20th century. The investor and business magnate was right. When people row in sync, the results they achieve are astounding. Those who share this spirit and, in addition, are interested in investment should know what is crowdfactoring.

Traditionally, investment was more individual. Everyone looked out for their good and paid little attention to the needs of others. Investors were only interested in the profitability of the products. And companies were limited to approaching banks, often ignoring other financing options.

But the tables are turning. We are amid a boom in ethical investment, alternative financing and the social economy. Today, an investment model that not only focuses on economic aspects but also places people at the center of the equation and considers the impact of operations on society and the environment is gaining ground.

In this new context, savers rely on each other, joining forces to achieve common goals. And all those who align themselves with this mindset need to understand what is crowdfactoring.

What is crowdfactoring?

This alternative financing system is based on a very simple premise: the advancement of invoices. Cash-strapped organizations use their outstanding invoices to obtain financing. Then, through an assignment contract, they waive their collection rights in favor of investors, who advance them that amount.

However, the businesses receive only part of the full amount. This is because interest (the profit intended for the individuals) and commissions (the percentage obtained by the platforms on which these operations are carried out) are deducted from the original figure.

This does not mean that, in the past, companies did not try to collect their invoices in advance. Some were already using these methods, but instead of relying on a pool of people, they chose to seek financing from private factoring firms.

As the years went by, the popularity of crowdfunding mechanisms increased dramatically. Factoring was no exception.

Little by little, companies discovered what is crowdfactoring and began to join its ranks, replacing conventional entities and their bureaucratic processes with groups of savers.

In this way, to cover the total amount of the invoice, businesses no longer use a single actor but pool the contributions of a group of individuals. And they can multiply their capital while financially supporting the companies around them.

The advantages of crowdfactoring

To fully understand what is crowdfactoring, it is not enough to understand how it works: knowing all the benefits of this mechanism is essential.

One of the main attractions of this system is the possibility of recovering the capital invested in a short period. Crowdfactoring works short-term, so people do not have to wait years to enjoy their profits. Depending on the platform and the operation conditions, they can collect their profits in one, two or even three months.

This is a very accessible modality for all players since it is possible to participate with very small amounts of money, even fifty euros. The investment is no longer reserved for the great fortunes: the most modest savers who know what crowdfactoring is can get a good return with little money. It is, therefore, one of the most accessible investment instruments.

In addition, people who decide to invest in crowdfactoring take advantage of a unique opportunity to diversify their investment portfolio and optimize their investment strategy. A decisive move to minimize the risk they face. If one of the products they have bet produces losses, the impact on their financial situation will be insignificant since the others can cushion it.

This diversification strategy is also very useful for the organizations themselves. By broadening their sources of credit, they will considerably improve their financial stability, which is no longer dependent on a single entity.

Finally, companies should remember that financing obtained through crowdfactoring does not appear in CIRBE (Central de Información de Riesgos del Banco de España). In this database, companies’ debts are recorded, so the attraction for them is even greater.

This set of benefits causes more and more people to know what is crowdfactoring and choose to direct their capital towards this system, whose popularity continues to grow.

Crowdfactoring is an alternative financing mechanism based on the advance of invoices

Crowdfactoring, with or without recourse?

More is needed to understand what is crowdfactoring. To invest wisely, it is necessary to be aware of all the modalities since this is not a closed mechanism. There are two types of crowdfactoring: with recourse and without recourse. And the difference is not insignificant. The investor can enjoy protection or risk losing money depending on which one is chosen.

The main difference between the two lies in who assumes the risk of non-payment if the firm’s client does not pay off its debt at the end of the transaction term. If this risk falls on the organization, we deal with recourse crowdfactoring. In this case, the company must return the money to the individuals.

However, in non-recourse crowdfactoring, the investors have to reclaim the debt from the client, and the company is free from liability. This method provides fewer guarantees for savers, who are more unprotected.

For this reason, most platforms promote the recourse crowdfactoring option to encourage investment.

It is important to bear in mind that there are other types of crowdfactoring: with or without notification (depending on whether or not the client is informed of the operation) and national or international (depending on whether or not the actors involved are part of the same country).

But it is the first category that must be considered before confirming any investment. People should make sure that they are aware of the conditions and the risk they are taking, trying to seek all possible guarantees.

How crowdfactoring platforms work

As seen above, crowdfactoring operations are carried out on alternative financing platforms. These online firms serve as a meeting point between savers and organizations, providing them with a secure online environment to meet and close deals.

Inversa Invoice Market is one example. More than 2,600 businesses have already obtained financing on this Spanish platform, with more than 15 million euros invested in invoices and an average return of 6.97%.

Inversa’s operation is extremely simple. To start investing, you only need a device with an internet connection and a minimum of twenty euros. Then, after registering on the platform, investors access a very extensive market of invoices, looking for a company that fits their needs and aligns with their values.

Once they have found one and the deal is confirmed, the money is transferred to the company, and the investor will instantly receive the interest. This immediacy in the distribution of profits is one of the great advantages of Inversa.

During the established time, the organization enjoys the loan. And when the term ends and the client pays the invoice, the original amount is reimbursed to the individual.

Thanks to this instrument, investors can earn a return on their savings while helping businesses to remedy their liquidity problems. Anyone who knows what is crowdfactoring will know that the great attraction of this system is to generate profits for both parties.

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