What is Crowdlending and how does it work?

If you are in the finance environment, you may have noticed that crowdlending has emerged in recent years as an innovative way to finance new ventures and small companies. But if you are not quite sure what it is or how it works, just keep on reading because we got you covered!

Crowdlending definition

Crowdlending, also known as marketplace lending or P2P lending, offers alternative funding opportunities to businesses from individual or institutional investors without going through the traditional banking route. Companies can finance their projects with diverse sources of funding and investors can access large investments by co-financing projects by lending money in return for interests. 

Crowdlending platforms 

Crowdlending platforms are online electronic platforms that work as a marketplace, displaying investment opportunities and matching loans with investors. The platform acts as a marketplace, matching the needs of the company to that of the investor. Investors can browse and search for individual projects, or the platform can also highlight opportunities for them to invest in. Businesses that are looking for funding apply for a loan by signing up with a platform. They provide credit information and go through a series of checks and assessments to determine the suitability of the loan, and if the risk is acceptable, the platform prices it. 

The platform must collect enough fees to continue to service other loans. They generally support the selection process the investors have for loans and provide a risk assessment of each project in the form of credit scores. 

Different models of crowdlending platforms:

Three-party P2P platforms act as intermediaries between lenders and borrowers. They either use a client segregated model where all the funds and repayments are separate from the platform and only flow through the client accounts, or a balance sheet model where the loans are originated in the platform’s account. They then sell the loan to investors, but the default risk stays with the platform. These platforms do not source their funds from the crowd, but usually rely on wholesale funding sources.

Four-party P2P platforms also include a loan originator in the process: this makes external loans from outside the platform also available to borrowers. They use the notary model, acting as a broker to match the loans of a bank to the lenders. The banks then sell the loans to the investors, which transfers the default risk at the same time. These loans can be sold directly, or on to another platform subsidiary that has the option of repackaging them into multiple loans. 

Advantages to crowdlending 

Crowdlending is an investment method that is transparent, flexible and allows for risk diversification. It builds owner communities, and even with a small amount of capital you have access to large investments. Its flexible nature means you can spread the risk between multiple investments, platforms and countries. The duration is also flexible, and you can invest in short term or long term loans. On higher risk platforms you can expect returns of around 12-14% per year. 

For companies looking for funds, the loan application is straightforward and efficient. Online platforms have lower overhead costs than a bank would, and that often means lower interest rates for borrowers. For busy startups and new companies everything is online, so there is also the added benefit of not having to worry about business hours. It also helps the business to evaluate the viability of their business plan by seeing how much investor interest it generates. 

Disadvantages to crowdlending 

The disadvantages to crowdlending are similar to the risks that come with any investment. It is always advisable to diversify investments to spread risks, and to invest in platforms that have a BuyBack guarantee to avoid borrower default. A good platform will also be prepared for bankruptcy with a third party contract to protect investor loans. Like any business, platforms can be open to fraud and information security risk, but they can alleviate this by keeping customer accounts separate from the assets of the platform. A good platform will protect investments.

Connecting companies and investors

The primary advantage of crowdlending is the direct connection between the investors and the businesses looking for funding. One of the best things a platform can do is find the right project for the right investor. At Finnovating, our Matching algorithm is designed to connect potential profiles of clients, partners, services and investors that suit you and your company. As an investor, it is easy to discover your next opportunity with over 50,000 active companies and 300 different models on the platform. 

Crowdlending platforms make it easy for investors to discover new and interesting investment opportunities and also provide more visibility for startups. They also promote the business brand as investors track their progress. There are many benefits for both lenders and borrowers in this alternative to traditional banking. The Finnovating Marketplace creates connections for those businesses that spend too much time searching for funding, and those investors who want to find new and exciting ventures. CTA