An alternative model for investing

Monday, 13 may 2019 | Redacción CEU

Music bands, novice writers and pioneering entrepreneurs have found in the Network an ally in order to make progress in the achievement of their dreams. Thanks to crowdfunding, they can make strangers come to an agreement, support their projects together and thus become their small sponsors. This model, which years ago could seem impossible, now enables many of these entrepreneurs and dreamers to access alternative financing that breaks away from  everything: bank loans, "family, friends and fools", private investors, venture capital,...  Crowdfunding has laid the foundations for a new financing model, because... What if this formula is not only profitable for their recipients, but also for the until now altruistic investors?

Crowdlending is an alternative source of financing which is used by means of the micro-loans of companies and individuals. As its name suggests, they are loans which are made by a heterogeneous group of individuals, who believe in a project, invest in it and receive a monetary compensation in return (the interest that loan applicants pay). This type of relationship is established in dedicated platforms, which are now experiencing a period of growth thanks to the boom of the world of fintech companies. They are in charge of analyzing the financial solvency of  firms and the risk of operations, making a selection of projects and managing the whole process. Of course, they charge a commission for it.

The secret of crowdlending is that any type of company can use this model without having to resort to traditional financing, in particular to banking one. This fact enables them to have a greater flexibility, dynamism and accessibility. In turn, the small sponsors not only enjoy the feeling of supporting a project they trust, they also obtain a high return when the loan and their interest are paid.

What is special about crowdlending?

One of the great advantages of this type of collective financing is its interest rate. Investors benefit from a much higher profitability than that offered by conventional banking financial products such as deposits or fixed income investments. In fact, it is one of the investment alternatives that offers the best risk-return ratio. In addition, those who decide to invest in these crowdlending initiatives can do so with small contributions. In other words, it is not necessary to have a lot capital to start investing.

Since crowdlending attracts new and small investors, it is usually considered a more democratic financing model. Besides, these platforms usually have intuitive and simple interfaces. On them, those interested can access useful information about the level of risk, term or profitability of each project. Some platforms even offer tools of self-investment, so that investors can generate income without spending much time on this task.

Some crowdlending platforms offer an investment protection mechanism. Basically, it consists of a repurchase guarantee that establishes that, in case borrowers do not return loans and there is a  delay, the crowdlending company would be responsible for the return of the loans and their interests (depending on the type of contract, it will include or not the generated interests). This is a safer formula, but, of course, also proportional in terms of profitability. The higher the risks are, the more benefits they provide (and vice versa).

For their part, borrowers also enjoy certain benefits. For example, obtaining funds is faster on these platforms than in banks (between 30% and 50% more agile), and they do not require the hiring of complementary services. In addition, as it is an independent funding source, it is easier for these projects to overcome periods in which there is a credit crunch. Furthermore, crowdlending is often very competitive in terms of costs for those SMEs which seek funding.