Lately the word Crowdfunding has become very popular. With crowdfunding a group of people fund a project in exchange for rewards. However, from crowdfunding has evolved crowdlending, which is really something completely different.
In crowdfunding, a user makes a small contribution to a project because he/she wants that project to be realized. This can be a movie, a new electronic gadget, a book, etc. Although the contributions are small, by pooling many of such small contributions, large sums can be raised. The users contribute the money without expectations. Sometimes they will get their name mentioned in the book, get a t-shirt, or even get the first developed gadgets at reduced price. But if the project is not successful, the contribution will be lost. This is ok, since the contributions are relatively small, and the user knows about the risk and no not expect their contribution back.
Not so in crowdlending, which offers a yield and a promise to all the users that make the project possible. In other words, a group of persons contribute small quantities to a large loan. The company receiving the loan is obliged to pay back the principal and interest to the users, as if the users were the bank. And since the quantities are small, users can invest in different projects at the same time, hence spreading the risk and helping various projects at the same time. Crowdlending enables smaller investors to make the same decisions as big investors would, i.e. to invest directly in projects they like, with full control and transparency.
Let’s take an example: a telecommunications company that needs to invest 100.000 € to extend a fiber optic network that is already in operation and profitable. Given the characteristics of the long-term project, like any company, they will have to finance part of the transaction. Before crowdlending, they could only go to a bank to finance that operation. The bank would only look at their interest, and didn’t care about whether a project is interesting to be realized. With crowdlending, the company can present the project to the general public. Offering the loan directly to many smaller investors, they will get higher returns than the bank can offer, and they have full control on where the money is invested. The crowdlending platform ensures that the loan complies with minimal requirements, and takes care of all the management and legal requirements.
Crowdlending is democratizing financial services by increasing the accessibility of investments to as many people as possible. Previously, only banks could invest in such projects. Now, thanks to crowdlending everyone with a minimum amount of capital to invest has access to these opportunities. But crowdlending also improves transparency: if projects are not well defined, investors will not invest in them. That means extra work for developers, but also a possibility to fund projects that before could not be funded. Not because they were not viable, but because they were not interesting for the banks.
It’s clear that crowdlending can add a lot of value, not as a substitute to the banks, but as a complement to the financial system.