Getting started with crowdlending: what it is and how it works
Over the last decade, crowdlending has emerged as one of the most promising new online investing and lending models. It is one of the fastest-growing segments in financial services. It acts as a bridge between those looking to invest online and those who need capital for business expansion, real estate or simply for personal use.
Crowdlending falls under the umbrella term, ‘crowdfunding.’ In its most general sense, it means raising money for a particular cause from a group of people, i.e. ‘the crowd’. Crowdfunding has been around in one form or another since the mid-2000s. It comprises various forms of fundraising where varying amounts of money are given by many people to support a particular effort or project initiated by a person or an organisation.
What are the different types of crowdfunding?
Crowdfunding can take many forms, such as donations or loans. In a broader sense, crowdfunding is divided into four different segments: reward-based crowdfunding, donation-based crowdfunding, crowd investing and crowdlending.
- Reward-based crowdfunding: Here, a product or service is offered as a reward in return for the money pledged to the project.
- Donation-based crowdfunding: As a donor, you simply donate to support a cause without receiving anything in return
- Crowdinvesting: With crowdinvesting, you can invest in a business in exchange for shares, i.e. percentage of a company’s ownership.
- Crowdlending: Here, you can lend money to individuals or businesses, where you will receive what you have invested plus the interest until the end of the loan duration.
What exactly is crowdlending?
Crowdlending is the practice of lending money to individuals or businesses through online services that match investors with borrowers. It is the process of using digital platforms to raise funds from a large pool of investors. In some parts of the world, crowdlending is referred to as Peer-to-Peer (P2P) Lending or Marketplace Lending.
The 3 segments of crowdlending
The crowdlending market is divided into 3 segments, namely:
1. Consumer crowdlending: These are loans given to individuals to finance the purchase of consumer goods or services.
2. Business crowdlending: These loans are given to companies, especially small and medium-sized businesses. It serves to finance a specific project rather than the whole enterprise and enables SMEs to play their role in investment, growth, innovation and employment. Business crowdlending is our area of expertise at Acredius.
3. Real estate crowdlending: These are mortgage-backed loans given through some crowdlending platforms to finance the purchase or refurbishment of properties.
Naturally, these are some of the segments that exist for now. With the industry’s ever-evolving and dynamic nature, we surely can expect these segments to expand in the near future.
How does business crowdlending work?
At Acredius, we specialise in business crowdlending. We strive to make loans accessible to Swiss SMEs and the investment process effortless for investors.
Whether it is buying new equipment, machinery or expanding the business, a business owner is constantly looking for ways to grow his or her business. Crowdlending significantly benefits businesses and investors alike, and it serves as a bridge between entrepreneurs and fundings.
So how does business crowdlending work in practice? To keep things simple, here’s the story of Antonia.
Antonia owns a café called “Piece of Cake”, selling baked goods and tasty treats in the picturesque town of Andermatt in Switzerland. With the number of customers growing, Antonia finds it challenging to meet the café’s demands and decides it is time to expand her business. She drew out a business plan and concluded that she needed to hire an additional baker, purchase two new ovens and other baking equipment. Having heard about this new alternative and simple way to access loans — Antonia decided to give crowdlending a try.
1. Antonia starts by finding a crowdlending platform she likes. She stumbles upon Acredius and uses it to apply for a loan online. She states the purpose of the loan (i.e. business expansion) along with the loan amount and loan duration. She then submits all the required documents.
2. The platform assesses the creditworthiness of her business. Through the information she provided, an evaluation of her creditworthiness is performed. Based on the risk categories, the platform proposes Antonia the loan conditions, including the interest rate.
3. Antonia is happy with the loan conditions and accepts them. On the platform, Antonia explains why her café needs the loan and why it is worth the investment. These factors help investors make more informed decisions while investing.
4. Antonia’s project is uploaded to the online platform, ready for investors to invest in her project.
5. Antonia’s project will be considered ‘ financed’ if there are enough investors to help her reach the loan amount. This means that each month, Antonia will pay back the investors the money she owes them along with interest. The investors will receive these monthly instalments for the duration agreed by both parties.
With thousands of unique and innovative companies looking for capital, crowdlending has become a highly desirable way for small business owners and entrepreneurs to easily secure funding.
At Acredius, we strive to support businesses that need that financial boost to make them unstoppable. Whether big or small, we believe that whatever we do can set off a chain of events that could put the business at the forefront.
If you are a business owner and looking to grow your company, you can explore more on our crowdlending services at www.acredius.ch. We look forward to helping fuel the success of your business!