Crowdfunding

Follow me and I'll show you how to get high returns using crowdfunding

Your savings account? No risks, but almost no returns. Invest on the stock market? High risks and large fluctuations, you need to have a constant eye on it. After a tip from a friend I looked into crowdfunding and crowdlending. Loans and investment projects are published on an online platform, and you can manually invest in these projects or let the platform do this automatically for you. the interest rates are attractive and range from 4% to a whopping 20%. And it requires practically no effort at all.

On this page I’ll explain how it works, what the difference is between crowdfunding and crowdlending, what the risks are and how little effort it takes. At the bottom of the page you can find several tips, but it is important to read everything and get your own informed opinion. Should you still have questions, just contact me and I’ll try to explain everything.

How does it work?

Traditionally, consumers and companies go to banks to borrow money, with steep interest rates. The money in the checking and savings accounts at that bank give those banks the means to grant those loans. The big difference between the interest rates of those savings accounts and the loans is what gives the banks their huge profits.

Crowdfunding platforms are online websites that people seeking better returns to companies seeking money to fund projects. It also connects those private investors to loan originators who grant loans to borrowers.

Crowdfunding platforms are basically online marketplaces for loans. You can buy a part of a loan, and in return you get your share of the interest and principal that is paid back for that loan.

There are different types of crowdfunding. Described above (loans repaid with interest) is peer-to-peer lending, also called crowdlending. Other forms of crowdfunding will get you a new product (e.g. Kickstarter) or a part of that company (when you invest in shares it is called equity-crowdfunding).

How does crowdlending work?

A person applies for a loan from a loan originator. This loan originator handles the paper work, checks the credit score and evaluates the risk before granting the loan.

Now comes the difference between crowdfunding and traditional financing. The loan is placed on the loan list of a crowdfunding platform (website). Here investors can buy a part of that loan.

During the loan period the loan originator collects the monthly or weekly repayments from the borrowers (interest plus principal). A part of this is paid to the crowdfunding platform, which distributes it among the investors that bought a part of that loan.

This is beneficial to the loan originators. Although they have to give up a part of the returns, they do not have to wait for the borrower to repay the loan before they can grant the money to the next borrower. So they receive a bit less for each loan, but they can issue a lot more loans to make up for this.

It is also beneficial to the (private) investors. The interest rates are a lot higher compared to the interest rates of savings accounts. It is also a lot more stable compared to stock market investments. Most platforms also offer guarantees and will repay your investment in case the borrower fails to repay the loan.

A simplified example: a person is granted a personal loan of €10,000 and will repay this in €200 monthly payments. The loan originator adds that loan to a crowdfunding platform. Investor A buys €1,000 of this loan (10% of €10,000), and investor B invests €100 (1% of €10,000). During the loan period the loan originator receives €200 each month. Investors have bought 11% of the loan, so the loan originator pays 11% of the payment to the crowdfunding platform (€22). The platform pays €20 to investor A (10%) and €2 to investor B (1%).

Examples of these platforms are Bondora, Fast Invest, IUVO, Grupeer, Mintos, and Twino.

Crowdfunding

Several platforms offer investors to finance corporate projects instead of consumer loans. You can invest in real estate projects, power plants, restaurants, wind energy parks, etc. In practice, the difference is not that big.

What is different, is that the loans are a lot bigger and several platforms have a minimum investment amount of €100. Most of these platforms do not have an option to automate the investment process. The platforms usually offer detailed information about the projects. Besides the project descriptions you can find risk analysis, annual accounts, etc.

Examples of these crowdfunding platforms are Envestio, Crowdestate, Crowdestor, EstateGuru, and Funding Circle.

Secondary market

Several crowdfunding platforms have a secondary market, where investors can buy or sell parts of the loans. This offers investors who need their money back to get it faster, and there is even the possibility to sell with a profit when demand is high.

Other platforms will buy back your investment, no questions asked. Of course there might be a fee involved. Overall it is better to invest in short term loans when you think you might need your money back sooner than later.

Risks and guarantees

Most platforms require you to identify yourself. Usually by uploading a copy of your password, ID card, driver’s license, utility bill. This is mandatory for platforms in the EU, as there is a European law against money laundering.

Your deposits must come from your own checking account. Your online account will be coupled to that account, and withdrawals can only happen to that coupled account. This helps to keep your money safe.

Most platforms offer buyback guarantees or payment guarantees. Loans with buyback guarantee will be automatically bought back in case the borrower is unable to repay the loan (usually within 30 or 60 days). The platform or loan originator will take over the repayments for loans with payment guarantees in case the borrower is unable to pay.

When loans are granted for large investment projects, the companies usually have a mortgage or other collateral. In case of payment problems the platforms will actively try to get the money back for you.

Of course there is always the risk of the platform getting into trouble, with the possibility of loosing all your money. So never invest more than you can afford to loose, and spread your investments over several platforms. Also monitor your investments at least once a month. Should the performance of one platform go down, be prepared to move your investments to other platforms.

Which platform should I choose?

The best answer is not to pick a specific platform, but spread your investments over several platforms. I can’t tell you exactly which platforms are best for you, but I hope that all the information on my blog plus the monthly overviews give you enough information to make informed choices.

You can try one but as soon as you start to invest more money you have to lower your risk by investing via multiple platforms. This also allows you to compare them yourself.

All platforms on my blog are within the EU and the Euro zone. Deposits are easy, you can use normal SEPA bank transfers. You can also look for local platforms within your own country. In the Netherlands we have Lender & Spender, and also a local branch of Funding Circle (amongst others). Investing in local businesses may give you a good feeling, if the return rates are OK of course.

Can you give a few tips anyway?

Here are a few tips, but remember to do your own research and spread your investments.

A safe choice is Bondora. Make sure to use the Go & Grow portfolio, this is more like a supercharged savings account. I’ve read people have mixed results with the other portfolio options. The Go & Grow plan will give you 6,75% interest, and you don’t have to do anything for it besides creating a Go & Grow portfolio and make a deposit. You can start with a minimum of €1 and you can withdraw your money at any time. It is also very suitable when you want to invest large sums of money.

High interest rates and an automated investment option make IUVO one of my favourites too. You can start with €10, but is also shines when you invest €1,500 or more. Also one of the ‘no effort’ platforms.

My final tip is to look at the other platforms. There is nothing like your own gut feeling. When you combine that with the numbers and information on my blog you should be able to do quite well for yourself.