Crowdfunding loans is gaining in popularity. High-interest rates up to 20% per year. Attract investors from all over the world. The bank requirements for borrowers are getting stricter and the access to money is getting harder. Crowdfunding platforms step in to fill the market gap.
There are however some pros and cons when it comes to crowdfunding loans. Most of them relate to the magic triangle of security, liquidity and yield. In this article, we will go through the features of different loan types to help you better understand the differences from an investor’s point of view.
This post is brought to you by Jakub Krejci, an experienced P2P investor that helps finance business and personal loans on various European platforms. He shares his knowledge and reviews on his blog kubasjourneys.com.
Crowdfunding Business Loans – The Pros
Supporting the local economy
Crowdfunding business might as well support the local economy and create new jobs. Investors, therefore, contribute to the development of new projects in a certain geographic area.
Real securities
Business loans are backed by real securities such as commercial collateral, mortgage, and personal guarantees. Personal loans are not secured by any real securities which means that investors need to trust the platform or the loan originator to collect the debt.
Free Marketing
Business uses the platform to spread the word about their business idea which can create new customers, particularly if the development project is oriented towards end consumers.
High Yields
The investment in business loans generates high interest up to 22% p.a. Particularly business loans in the baltic countries can bring very interesting yields compared to more conservative asset classes such as savings accounts or funds. Crowdfunding platforms that help finance business loans typically don’t collaborate with loan originators (middlemen between the borrower and the platform) which resolve in higher returns for the investor.
Credit check
The crowdfunding platform checks the financial plan of the business project to evaluate whether the business can repay its debt back to the investors. Typically around 80% of the applications get declined by the platform. The crowdfunding platforms are interested in only listing business loans that have a high chance to be repaid in time.
Crowdfunding Business Loans – The Cons
Investing in unknown markets
Investing in other markets increases the risk. When it comes to debt collection there are often local laws that investors aren’t aware of. If the borrower stops paying, the investor needs to trust the crowdfunding platform to collect the money. Read more about the risks connected to crowdfunding business loans here.
Longer capital commitment
When investing in business loans, capital commitment is typically longer as compared to investments in personal loans. Withdrawing capital from the platform might not be possible instantly or only against fees.
Lack of investment opportunities
Many crowdfunding opportunities are funded within minutes which makes it harder for the investor to participate. This is the case for many crowdfunding platforms that can’t keep up with the supply of business loans compared to the demand of their investors.
Crowdfunding Personal Loans – The Pros
Short Capital commitment
Investing in short-term loans allows investors to withdraw money instantly or within a few days. This isn’t typically the case with business loans.
Buyback Guarantee
Many crowdfunding platforms that list personal loans collaborate with loan originators that provide a buyback guarantee for their loans without any additional fees. The loan originator promises to buy back investor’s investment in case the borrower is late with its payments for more than 60 days.
Diversification
The amount of personal loans on the market is higher than the supply of business loans. Therefore it is easier for the investors to do diversify across loan amounts, countries and loan originators. When investing in business loans the diversification options are rather limited.
Crowdfunding Personal Loans – The Cons
Limited information
Most investors that invest in personal loans don’t have many options to view the financial situation of the borrower and evaluate for themselves whether the borrower can repay the debt. Crowdfunding platforms that list business loans offer more information about the borrower.
No physical securities
There is no collateral or mortgage when it comes to the securities connected to personal loans. Investors need to rely on the loan originator to collect the debt. Many platforms rate the individual loan originator to give you an idea to what extent the loan company is able to collect the debt of their borrowers.
Funding consumer goods
Investing in personal loans supports the spending on consumer goods such as cars, electronics or even vacations. These investments lose their value immediately which makes it a rather expensive investment for the borrower.
Differences between
crowdfunding business loans and personal loans
The main difference between crowdfunding personal loans and business loans are the securities. While a personal loan is an unsecured debt, there are no real guarantees but only the trust into the platform that investors will get their money back. With business loans, the crowdfunding platform holds commercial collateral as well as the personal guarantee of the borrower.
Envestio is a crowdfunding platform that connects investors with business owners who want to expand their business operations. There are no additional middlemen involved, which results in higher interest payouts for the investors.
Envestio is one of the few P2P lending platforms that offer a buyback guarantee for already funded business loans. Investors have the option to withdraw the capital from the platform for as little as a 5% fee.
This option isn’t currently supported by any other platforms that help finance business loans. Investors need to wait until the end of the loan period to access their money again.
Join Envestio today to invest in business loans and earn up to 22% of interest.
