Definition of debt crowdfunding or crowdlending
Crowdlending or debt crowdfunding allows individuals to lend money directly to other individuals or businesses. Another name for Crowdlending is “peer to peer” or “peer to business” lending. Crowdlending is not new, and has been around for several years.
Succesful companies are for example ZOPA in the UK or Prosper and Lendingclub in the US. Prosper has more than 2 million participants who have invested more than 600 million dollars together in loans, followed by Lending club with 300 million dollars. Zopa has already placed more than 450 million pounds.
Main differences between a debt crowdfunding platform and a bank
The main task of the banks is to intermediate between individuals with money and other individuals or entities that need money. The banks pool the money of many smaller depositants, and allocate this money to loans. For this the bank receives a margin, which is the difference between the interest paid on the deposits and the interest charged on the loans.
The banks are very necessary in modern economies. But because the money you have deposited is pooled with the money of many others, it becomes anonymous and you have no idea where or to whom your money is lend. And you have no idea what costs the banks charge for their intermediation.
The banks also have to make choices to whom they lend; In general they can only lend what they have captured in deposits. This is why many profitable and low risk projects have difficult access to bank loans: they either don’t get the loan, or pay too high interest rates making the projects less attractive. The banks have other alternatives, or don’t understand the project.
Impact investing crowdfunding
You can generate huge impact through crowdfunding. Instead of putting your money in a fund or some of the investment products offered by the banks, you can lend it directly to a project or company you believe in. We wrote an earlier article about impact investing.
Some of the crowdlending platforms offer such impact opportunities to their members. In the case of ECrowd!, the projects offered for investment are always audited and approved by independent experts, ensuring both, company and project, to be high quality, with real, measurable impact on society.
As a participant in a crowdlending platform you directly decide which projects you would like to support, while getting the benefits of the investment. This is real impact!
Advantages of impact investing debt crowdfunding
There are clear advantages for both sides participating: the lenders (any person like you, willing to invest at least 50€) and the borrower (the project presented for investment).
Since crowdlending platforms operate electronically, they have a much lower cost structure. Therefore, you can enjoy a higher return than on comparable investments made through traditional channels, you have huge decision power on where your money is made to work, and you habe absolute transparency regarding cost.
For borrowers the advantages are: less dependence on the banks, a faster and more agile process and interest rates that adjust more to the real cost of money, making more projects likely to happen.
It is important to note that to be less dependent on one single investment, you should take a portfolio approach: lending smaller amounts to many projects at the same time. Like this you can have higher impact, and can build a portfolio that fits exactly your personal preferences.
Crowdlending is a great way to put your capital at work, getting higher returns and making an impact. It is much easier, faster and funnier than putting your money on a bank account or investing in funds.