Crowdlending: an innovative tool for business financing
Crowdlending has positioned itself as a disruptive financial alternative in the market landscape. This model, which allows companies and individuals to access financing through multiple individual investors, reflects how digitalisation and technological platforms are redefining the rules of the financial game.
What is crowdlending?
The term crowdlending comes from the union of the words crowd and lending, and describes a crowdfunding model where individuals or companies obtain loans from multiple investors through specialised digital platforms. Unlike other crowdfunding methods, such as reward or donation crowdfunding, crowdlending involves a direct financial return for investors, usually in the form of interest on the capital lent.
This system not only democratises access to finance, but also opens up new opportunities for investors seeking to diversify their portfolio with innovative financial products.
What types of crowlending are available in the market?
Crowdlending has evolved to encompass different modalities that are adapted to the needs of borrowers and the preferences of investors. These types of crowdfunding are mainly classified according to the profile of the loan recipients. Below, we explore the main categories:
1. Peer-to-Peer Lending (P2P)
The model known as peer-to-peer (P2P) involves individual investors financing individuals directly, usually for personal consumption needs. In these cases, borrowers tend to be individuals seeking credit outside traditional institutions. Moreover, in this type of crowlending, interest rates tend to be high, which is attractive to investors. However, it represents a higher risk, as the loans are not guaranteed by a company and investors need to be aware of potential repayment difficulties.
2. Peer-to-Business Lending (P2B)
Business crowdlending, or peer-to-business (P2B), focuses on financing business projects, especially those of small and medium-sized enterprises (SMEs). Within this category, three relevant sub-types are identified:
i. Crowdlending for businesses: These are loans designed for businesses seeking immediate liquidity or working capital to finance operations. This type of lending is usually backed by the company’s ability to pay, which reduces the risk for investors compared to P2P.
ii. Real estate crowdlending: In this type of lending, investors provide funds for construction projects that are then used for the subsequent sale of real estate. It is important to differentiate it from real estate crowdfunding, in which investors acquire shares in the property. In real estate crowdlending, the money is lent to the developer or promoter to implement the project.
iii. Crowdfactoring: This consists of advancing money to a company in need of liquidity while it awaits payment of invoices or promissory notes. This type of crowdlending provides investors with a return based on the discount applied to the advance of those invoices and allows borrowers to advance payment of their invoices through contributions from multiple investors. While traditional crowdlending offers conventional loans, crowdfactoring focuses on financing receivables. This ensures that the investor has a direct guarantee on the company’s future revenues.
What are the advantages of crowdlending?
Crowdlending offers numerous advantages, especially for small and medium-sized enterprises (SMEs) that face barriers in accessing bank loans.
From the borrower’s point of view, this tool allows companies to improve their cash flow, manage short-term payments, finance expansions or launch new products without compromising their capital structure. However, unlike traditional avenues, it stands out for the following reasons:
- Access to agile finance: Processes on platforms are often faster and less bureaucratic than those of traditional financial institutions.
- Non-consumption of CCR: These loans are not counted as part of the credit obligations registered in the Bank of Spain’s Central Credit Register (CCR). This allows companies to obtain financing without affecting their bank borrowing capacity, which is especially valuable for those who wish to maintain flexibility for future applications for traditional credit.
- Diversification of funding sources: Helps companies reduce their dependence on banks.
- Lower interest rates: Interest rates are generally lower in this mechanism compared to traditional financing channels.
- Better visibility of projects: Entrepreneurs can attract investors interested in specific sectors, strengthening their networks of contacts.
On the other hand, from the investor’s perspective:
- Lower volatility: Crowdlending is not affected by stock market volatility or market rumours.
- Returns: Crowdlending investments offer higher returns compared to more traditional alternatives. Investors typically charge monthly fees plus interest.
- Less bureaucracy: In addition, the financing terms are not as long, so the investment gains liquidity very quickly.
Despite its advantages, crowdlending is not risk-free. Investors should carefully review the terms and conditions of the capital repayment guarantee. For their part, borrowers using crowdlending mainly face the risk of disclosing financial and strategic information that could be sensitive, and should protect themselves by signing confidentiality agreements (NDAs) or similar contracts.
Crowdlending: trends and perspectives
Crowdlending is emerging as a financial tool with great potential to transform access to credit in the business environment. However, its success depends on a correct application of the regulatory framework and a transparent approach by platforms and participants.
The growth of crowdlending is closely linked to the expansion of fintechs and the digitisation of the financial system. According to recent data, this market continues to grow steadily in Europe, with Spain as one of the leading countries in the adoption of this alternative financing model.
For companies looking for funding and investors looking for opportunities, crowdlending can be an innovative and viable solution, provided that the inherent risks are properly addressed.
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