Should I do crowdfunding or crowdlending?
Lately you hear a lot about crowdfunding and crowdlending, especially since the publication of the Spanish draft law on February 28th to regulate these new ways of investing. But what are exactly the differences between crowdfunding and crowdlending?
Before we explain these, it is important to distinguish between crowdfunding as a donation or reward and as an investment. The donation/reward based model is the most widespread and well known. Here people contribute money to a project and either get nothing in return (because they like the project and would like to contribute) or get some kind of reward, like a t-shirt, a mention, or the product for which the campaign is started (a book, a movie, etc.) In these campaigns the money is not invested, but contributed to the project.
Crowdfunding as an investment
At the other end of the spectrum we can find crowdfunding as an investment in its 2 different forms, equity crowdfunding and crowdlending. The main difference between the 2 is the fact that in equity crowdfunding the money is invested in a company in exchange for a participation in the company, meanwhile in crowdlending the money is lent to a company or project and you will get your money back through a fixed payment schedule, with a fixed interest.
Although both are meant to finance companies or projects, with the expectation to receive the funds back with a return, there are big differences between the two, the main difference being the risk assumed.
In equity crowdfunding you become a shareholder of the company, and you have no guarantees whatsoever to get back your funds. In theory, if the company goes well, you can multiply your investment various times. However, in case things go bad, you can loose the complete investment.
There is no fixed time horizon, no guarantees to get back your funds, and only when you sell your participation you can cash in on the gains.
Crowdlending is different: you lend the money to a person, company or project and they have the obligation to pay back the money with a fixed payment schedule and at a fixed interest rate. From the first month you are receiving interest and repayments on your money invested, meaning that from the first month you are already getting back part of your capital.
Since there is an obligation to pay back from the beginning, loans are only given to companies or projects that are already generating cash, and typically start-ups do not comply with this rule. Because of this, start-ups generally apply for equity crowdfunding and more established companies or projects do so for lending.
Equity crowdfunding vs Crowdlending
In below table we summarize again the main differences between the 2 types of crowdfunding:
|Risk||High There is no obligation to pay back your invested money and only in case of success you can typically expect a time horizon over 5 years||Moderate Your invested money will be repaid according a pre-agreed payment schedule, between 1 year and 5 years depending on the loan|
|Return||Potentially very high If the start-up is successful, your investment will typically multiply its value more than 10x||Moderate Interest if fixed upfront and payed according a pre-agreed schedule|
|Guarantees||No guarantees||Depends Depending on the loan there can be personal guarantees or claims on the assets|
|Follow-up||None Completely dependent on the management team and their goodwill to inform the investors||Monthly Because of the monthly payments of interest and capital, there is a constant flow of information between the company and the investors|
So, which type of crowdfunding is for me ?
Investing in equity crowdfunding does not exclude investing in equity crowdlending. As we have explained earlier here, it is important to diversify and therefore very advisable to use both ways of crowdfunding.
In crowdlending you can distinguish between crowdlending to persons, the so-called P2P crowdlending, and the crowdlending to business, the so-called P2B crowdlending. Generally P2P crowdlending is considered more high risk, and returns are higher, since the risk of default is higher. Here we concentrate on business lending, and currently there are 4 platforms active in Spain: ECrowd!, Arboribus, Loanbook and Crowd2b.
Finally, we point out that ECrowd is a P2B crowdlending platform, from which individuals can give loans to projects that have a positive social or environmental impact.
The ECrowd! team