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Crowdlending: Everything You Should Know

Crowdlending is one of the five branches of crowdfunding, which sometimes is also referred to s peer-to-peer lending (P2P lending) or marketplace lending. In this method, investors converge to co-finance projects by lending out funds in the form of loans to the borrowers (business owners) in return of interest. 

Crowdlending is one of the most lucrative businesses in the United Kingdom, and it can generate an average return on investment of between 12% and 14% per annum. 

This form of crowdfunding lets investors access large projects and investment opportunities such as financing a company or purchasing a building, that they wouldn't be able to manage on their own. 

The term crowdlending is just a fancy way of explaining the situation in which many investors come together on financing a loan instead of just a single banking institution. 

The P2P platforms operate at a rather cheap overhead than the traditional financial institutions and do not charge heavy fees. 

The earliest form of crowdlending emerged in the United Kingdom in 2005. The first P2P platform was Zopa, which has issued loans worth about 2 billion pounds since inception. 

Crowdlending is a relatively new investment concept that is gaining more popularity and attention across the world. In Europe, where the sector was born, it is growing extremely fast and has begun to establish itself positively.

How crowdlending works 

In simple words, crowdlending works through a platform that matches the borrower with the lenders. Through the platform, you will be able to access everything you need to know about the investment, the loan originator itself, the borrower, risks, returns, as well as creditworthiness.

In some instances, especially when short terms loans, car loans, personal loans, are concerned, the loan originator has already established the fund and approved the borrower. 

To simply put, the loan originator invites the investors on the P2P platform to fund the loan and will provide a share of the return for the investment (interest). 

If you are an investor, you don’t have to sweat over a central bank directly influencing your returns, which is always the case with bank savings or debts. You also get a detailed insight into the investment before proceeding. 

As we mentioned above, you can typically expect a return of between 12% and 14% per year on average with some type of security such as property, buyback guarantee, etc. 

Regardless of the amount you invest, you can always still invest small amounts in each loan. This way, you will have less invested in a single loan; therefore you minimize the risk and become more diversified. 

So, which is better for the five forms of crowdfunding? 

Let’s find out by explaining each category.
  • Reward-based crowdfunding 
This is the most popular and well-known form of crowdfunding. The best example of a reward-based crowdfunding platform is Kickstarter. 

Under this model, the owner of the project creates a campaign to fund their product and offer investors or backers rewards in exchange for their donations. The said rewards can be in any form, but usually are things such as advanced copies of your product, newsletter updates, behind-the-scene business tour, or commemorative t-shirts. 

The campaign can either be: 

Flexible – where you keep all the monies that you have raised, or 
All or nothing – where you don’t get anything if you don’t attain your fundraising goal. 

Equity crowdfunding or crowd investing

In this form of crowdfunding, you don't offer rewards. Instead, as the name suggests, the investors acquire part of the business in the form of equity. This form of crowdfunding is essentially like angel investing. 

It is estimated that by 2022, crowd investing will put around $31.3 billion in the pockets of the entrepreneurs from the current $11.2 billion. 

Unlike the first form of crowdfunding where you can raise funds without any restrictions, in crowdlending investing, you must have started to generate revenue with your product. For this reason, you may have a hard time convincing investors to join your project than other forms of crowdfunding. 

Donation-based crowdfunding 

With donation-based crowdfunding, investors or backers donate money to your project without expecting anything in return. 

Invoice trading 

Investors buy unsettled invoices of a business at a discount and in return, receive the difference between what they pay for the particular invoices and the amounts stated on the invoices themselves. 

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