As an investor in ECrowd!, or any other crowdlending platform, you lend money to a company, based on a proposal from that company. However, once the money is transferred to the company, it is free to do with the funds what it wants. It’s only obligation is to repay the funds with interest according the pre-agreed payment schedule. To reduce the risk that the funds are used for other purposes, ECrowd! follows a project finance approach.
What is project finance?
According to Wikipedia, project finance is “the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors.” In simple words, the main characteristic of a project finance is that the funds of the loan are being paid to an isolated project and not to a company (sponsor), and that the project is responsible for paying back the debt, and not the company (sponsor).
In order to isolate the project, the investment project is executed in a separate legal structure, often a new company, called a special purpose vehicle (SPV). The sole function of the SPV-company is to execute and operate the project. Their only possessions (assets) are the equipment or infrastructure in which has been invested, and the only cash they earn is from these assets, and normally these companies do not have any employees nor offices.
Normally project finance is applied to very large projects, since it is very expensive for the banks to evaluate these projects, and many players are involved. ECrowd! follows the project finance method, in that each of the loans have to be executed in a separate structure, isolating the project from any other factors, and having only the project as a responsible for paying back the loan. Although there are always ways to channel the funds to other purposes, the risk is very much diminished and the complete separation of accounts will show any deviations very quickly.
To further decrease the risk of the project, ECrowd! can realize independent analysis of the project, using 3-rd party providers to check the legal structure and the technical solution. Funds are only liberated upon proper receipts and ECrowd! does the follow-up on the project.
A practical example
Let’s look at a practical example in energy efficiency. Recently we have investigated an energy efficiency project for a school. Most schools have old, very energy intensive equipment. Just think of all the lighting and heating that is necessary to operate and to maintain the proper environment. This is a large operational cost for the school. It makes sense to invest a new and more efficient equipment to reduce operational cost, reduce its CO2 footprint, and its environment. However, these are normally large investments, and the school does not have the funds to pay for these. Also banks are not very eager to finance these projects, because of their reduced size. Although realizing this project is a win-win situation, because of the financial barrier the project is not realised and a missed opportunity in general.
A company specialised in energy efficiency analysed the energy consumption of the school and concluded they can save 35% on their yearly energy bills. However, they needed to make a 75.000 euros investment. ECrowd! together with the energy efficiency company set up a new independent company, which will make the investment for the school, and thus the school will start saving on their energy bills.
The school has a contract with the new company that 25% of the savings will be paid to the new company to pay for the investments. ECrowd! finances the new company through crowdlending, where the funds are originated from small and medium investors that contribute from 50 euros, and get their money back over a period of 3-5 years with a pre-agreed interest. The interest and capital repayments are paid for from the 25% payments made by the school, which they pay from the savings achieved on the energy bill.
Crowdlending, a win-win-win
The above scenario is a win-win scenario: the school wins because they lower their cost and their CO2 footprint, and investors win, since they can get higher returns on their investments.
Crowdlending is a new, more efficient way to intermediate in the money markets. Many platforms exist, like Arboribus, LoanBook, Crowd2B, or ZenCap. However, by investing through ECrowd!, you not only benefit from the higher returns, but also contribute positively to society. This will convert the win-win into a win-win-win, as in above example where society wins through reduced energy usage, less pollution and reduced CO2 footprint.