What is Crowdlending and how does it work?

Despite the wide range of free services offered by the Internet, in order to create quality commercial projects, companies and online businesses, a significant investment is required. Buying domains, hosting and other resources for logistics is not an easy or cheap task.

As with any business, web projects of this type need to be financed to get all the necessary tools in order to achieve success. The growth of sales and increase of the customer base makes it necessary to look for investment alternatives that allow greater stock capacity, buy new machinery or simply have liquidity.

To do this, asking for money to family and friends or applying for loans to a bank is no longer necessary. Crowdlending is presented as a new investment strategy that makes it possible to receive the necessary funding to undertake a certain project.

In this article you will discover what Crowdlending is, what are its advantages and disadvantages, as well as its different variants and how you can benefit from this strategy.

What is Crowdlending?

Crowdlending is a form of financing for small, medium-sized companies or entrepreneurs of various kinds. It’s especially used to finance businesses that are developed on the web, as e-commerce, among others.

The rise of this form of financing is due to the rapid growth of the Internet and online interaction technologies. The increase of communication between users in social networks and forums has allowed investors and entrepreneurs to relate with the aim of devising various projects.

Crowdlending is a form of Crowdfunding, a strategy that boomed in the 90s. It consists of any person collecting a certain amount of money to be used in a particular business.

This alternative makes investment possible, but it doesn’t mean that the investor will receive economic benefits, but rather some participation, thanks or mention about their help.

Whoever receives this investment, does it as a loan, so they’ll have to pay the investor the agreed amount in the term stipulated by both, which, for example, can be done through a payment schedule.

Types of Crowdlending

In relation to the parties involved, there are two types of financing for companies or SMEs that operate under the Crowdlending format:

• Crowdlending P2P: It consists of a model of loans between individuals. Those who need funding are entrepreneurs who need liquidity to start or grow a business. These proposals are published on certain platforms after being accepted by the administrators of the same, who sets a price according to the magnitude of the project or the requirements of the person requesting the investment. Then, investors can see which are the proposals and choose the one they’re most interested in.
• Crowdlending P2B: This is a lending model between companies and individuals. Financing proposals are raised by legal entities, companies that meet certain requirements. For instance, that they haven’t been recently created or have a significant volume of turnover, are some of the requirements of these Crowdlending platforms.
• Social and educational Crowdlending: Some platforms are only interested in investments that involve a social benefit, Although this is not really the fundamental objective. Support for vulnerable social groups, taking care and protecting the environment or implementing better educational and training strategies, are some of the elements that need funding proposals to be published on these platforms.
• Crowdlending technology: Technology is undoubtedly a niche market that is becoming increasingly powerful. This is known in the Crowdlending platforms, and for this reason, some of them only accept proposals from the technology sector.
• Operational Crowdlending: This is where operations that have different nature to those mentioned above are circumscribed. A loan for a clothing store or decoration is an example of this type of investment.

Benefits of Crowdlending

There are many advantages offered by this method of financing, both for investors and for entrepreneurs. Do you want to know what they are? Here are some of the benefits that Crowdlending can have for investors.

It’s a highly profitable strategy for financing companies whose figures of 6 and 14 percent are achieved in this regard and also with a minimum percentage of risk.

Crowdlending is a safe method, since the platforms dedicated to it perform a thorough analysis of the solvency of the companies that apply for funding. They’re even required to submit guarantees, which contributes to the percentage of risk being quite low.

As for liquidity, these platforms have strategies to prevent any risk situation in this regard. For example, it allows the sale of investments to other investors and thus recovering the money lent. Similarly, the collection by installments allows the debt to decrease little by little, and in this way the amount invested is recovered month by month.

On the other hand, also for those who apply for this loan, the Crowdlending offers numerous benefits.

The Crowdlending is a form of rapid financing, where entrepreneurs get the amount needed to start a project more easily and start paying the debt as soon as possible. Because the process is established by online channels or platforms, it saves valuable time of bureaucratic procedures.

The interests and commissions in Crowdlending are much lower if we compare them with traditional banking. These are in relation to the level of risk that has each financing proposal.

Crowdlending companies offer greater flexibility in terms of installments and payment schedules. The repayment period of the loan is established depending on the nature of the proposal and the needs of those who request it. All this, with the advice and support of Crowdlending experts, taking into account the repayment capacity of the companies and the volume of the loan.

These processes are carried out through a transparent platform that keeps both parties informed of the entire process. Both the investor and the loan applicant get the necessary information about payments, benefits and so on.

Disadvantages of Crowdlending

Despite all the benefits mentioned above, this form of business financing also has certain risks. The most important of these is the loss of the investment due to non-payment of the borrower.

However, in this sense, the sector in which the investment is made has a great influence. For example, the percentage of investment risk in SMEs is close to 0%. Perhaps the greatest risk is in the financing of private individuals, since the creditworthiness of individuals is usually lower than that of companies.

For applicants there is the risk of not receiving the full amount of the loan that they indicate in their proposal. The Crowdlending platform can not guarantee that investors offer 100 percent of the requested amount and this can be a drawback to undertake a certain project.

Crowdlending is presented as a form of financing for companies much faster and flexible. Despite its limitations, in Spain we can find companies that have been financed in this way, as Hard Rock Café in Valencia and Amaranto, present in different cities of the country.

Both have a significant annual growth which serves to demonstrate the benefits of Crowdlending in entrepreneurship.