Crowdlending is a form of alternative business financing in which individuals, not financial institutions, finance the project of a person or individual in exchange for a pre-agreed interest rate.
"Crowd" in English means "crowd" and "To lend" means "to lend". Therefore, we are talking about the action of a crowd to lend something to someone. We know that this something is money, economic financing. However, we are talking about a loan, which means that it must be repaid in some way, in this case in the form of interest.
Origin: crowdfunding
These new forms of financing are derived from crowdfunding. It was born at the end of the 20th century as a consequence of the development of the Internet and the wide range of possibilities that technology offers. It consists of making a request for financing public on a web platform with the possibility for anyone who wants to participate in it. The conditions vary depending on the content of the project and the agreement on the repayment of the financing, if there is any.
In this application, the person seeking funding presents his or her case with the necessary information to convince the public, as if it were a business meeting. The context in which the project is being developed, the concept or values behind it, the objectives to be achieved, the individual motivations, the operation of the project, etc. This form of funding was born with the subtle tinge of the common good. Although, today, it has been extended to any type of project, it became popular in investments whose purpose was to participate in an action that was beneficial to the common good.
Over time, the technique has evolved into four different types of crowdfunding:
- Donation-based: the satisfaction of seeing a project go ahead, solidarity.
- Reward-based: you get a non-monetary reward, for example, appearing in the credits, acknowledgements, entry to the presentation event...
- Equity-based: money in exchange for participation in the project in the form of shares.
- Loan-based: This is crowdlending, where the loan is repaid in the form of interest.
How crowdlending is done:
Crowdlending is therefore a new form of peer-to-peer lending, which has become a cheaper, easier and more profitable way to obtain investors, with fewer requirements than those usually asked by banks.
Both this and other forms of crowdfunding are examples of new and cutting-edge capital raising , pursuing the democratisation of investment, outside of the traditional financial titans. In fact, in some cases it is a peer-to-peer situation, with one project funding another project that previously funded it, and vice versa.
"Companies and individuals apply for the funding they need through a Crowdlending company, which, after analysing and verifying that the applicant has solvency and repayment capacity, announces it on its platform (Marketplace) so that a multitude of small investors can see it and decide in which of all the possible investment options that exist, they want to invest their savings" says Estaban López in Guía de introducción al crowdfunding .
Crowdfunding Introductory Guide to Crowdfunding
The money lent is returned in the form of an interest rate previously agreed between the two parties. To calculate the interest rate, the average of all the lowest interest rates offered by investors is taken until the planned investment has been completed. In the event that this average rate is less than that offered by the investor, the interest rate initially requested will be respected. The interest is the only benefit obtained by investors, who do not get, as we said, either a share in the company or part of the dividends of the company.
All this is done through online platforms that receive applications from promoters who need financing. To do this, they have to study some aspects of the business or applicant, to assess the viability of the investment request and, if it meets the requirements, then they publish their advertisement.
Some of the information that applicants must provide are:
- Name and surname of the applicant or company name
- Province
- E-mail address to contact the applicant
- Business address
- Activity of the company
- Product or services offered
- Experience in the activity
- Sector
- Commercial strength
- Type of clients
- Amount requested and what percentage of this corresponds to the total investment required, as 100% of the investment through Crowlending is not always required.
- Timeframe in which the investment is expected to be raised
- Date of creation of the company
- Number of employees
- Net turnover in the last financial year
- Result of the last closed financial year
- Total assets in the last financial year
After a period of time that may vary, the Crowdlending platform informs the company if its application has been accepted. This may vary depending on the platforms used, but what is usually common to all is that some years of previous experience of the business is necessary to certify the solvency of the same. The platform acts as an intermediary that responds for the advertisements it publishes, so it must ensure the viability that the investments of its customers are returned.
If you are an investor looking to make some savings profitable, you can register in the same applications under an investor profile and not a company profile. You can then apply search filters to find among the investment offers the one that best matches what you are willing to offer and risk. The investor has access to all the information about the applicant company to make a decision with as much information as possible.
To assess the viability of these companies, there is a risk analysis team that investigates the solvency of the company and that of the applicants by checking important financial registers at national level, in the case of Spain, for example, the ASNEF (Asociación Nacional de Entidades Financieras), the RAI (Registro de Aceptaciones Impagadas) or the CIRBE (Central de Información de Riesgos del Banco de España).
All of the above makes this type of investment much more profitable than classic bank investments, but it is true that each of them is regulated by the regulations of the country in which the platform is located, although these are international in scope. It is therefore recommended to check the regulations of the different countries where the Crowdlending platform is based before investing or requesting an investment.
