After the global financial crisis that erupted in 2008, the profitability of many financial assets has not stopped falling. In efforts to stimulate the economy, central banks have pushed interest rates to historic lows. Inevitably, this has greatly affected the profitability of many financial assets. In this sense, investing in crowdlending has become a great alternative.
At the same time, the uncertainty generated by the financial catastrophe caused an increase in the cost of all types of loans and credits. In addition, not only was the cost higher, but the requirements to access these loans were increasingly demanding. Suddenly, investing in crowdlending appeared as an investment alternative.
In this environment with technical and financial difficulties to obtain financing, crowdlending platforms proliferated. On the one hand, access to financing became easier for the person who needed the loan. And, on the other hand, the person who lent the money obtained a much more attractive return.
But, what is crowdlending? What requirements are necessary to invest in crowdlending? Can we trust crowdlending platforms? What laws regulate this activity? These are some of the questions that, very aptly, will go through our heads.
Quite rightly, we say, because to paraphrase Warren Buffett, we should not invest in what we do not understand.
- What is crowdlending
- Participants in the crowdlending
- Get financing through Crowdlending
- Types of crowdlending
- Legal Aspects of crowdlending
- Advantages of crowdlending
- Disadvantages of crowdlending
- Tips for investing in crowdlending
What is Crowdlending?
Crowdlending is a form of collective financing through which small investors lend their money to another individual, company or project, with the objective of recovering the capital plus the agreed interest in a period of time previously set.
In simpler words, a person needs money and several people ‘spare money‘. The one who needs money is willing to pay an interest. Meanwhile, those who ‘have money left over’ want to make their liquidity profitable. That money that ‘remains’ is what is known in finance as savings.
Being a form of collective financing, the borrower gets all the money he needs. But he gets it from many different investors. Each investor puts a small amount, until completing the total loan.
The objective of this is, in case of default, to spread the risk among many lenders.
Traditionally, banks have been intermediating with each other. That is, they offered deposits and paid an interest to those who deposited money. On the other hand, thanks to that money they received, they could lend money to those groups that needed it.
Currently, thanks to the fintech revolution, crowdlending platforms are changing the way in which money is lent and capital is received.
Participants in the Crowdlending
Now that we know the concept of crowdlending, we will see who participates in the process. Everything can be reduced to three parts.
Borrower: Is the person who needs the money. Apply for a loan and the platform, according to various criteria, accepts it or not.
Lender or investor: They intend to monetize their savings. To diversify, they usually make small contributions to various borrowers. Helping, in this way, that those people who need capital can get the requested money.
The intermediary platform: The platform is the one in charge of accepting the requests to obtain capital and to manage everything related to the payment of interest. In short, the platform is who takes care of everything. So, in this way, borrower and lender focus on what is really important.
Steps to get financing through Crowdlending
Applying for business financing by crowdlending is extremely easy. These are the 5 steps.
Complete the application
It is necessary to complete a simple and fast assistant in the section requesting a loan from the platform itself. Once the application is completed with the required documentation, we can move on to the next phase.
Study and evaluation of the operation
The platform carries out the study of the operation and values it with a rating. In the case of MytripleA, with a valuation from A + (lower risk) to F (minimum valuation that the company must get to be published). Based on this rating, the platform sets a maximum and fair interest rate for both parties.
Publication of the operation
The approved operation is published on the Marketplace and that is where investors lend their money at the interest rate set by the platform. Even if they wish, they can reduce their profitability in favor of lowering the company’s interest rate.
The money in your checking account
Once the amount is completed for the contributions of multiple investors, the money is transferred to the company.
Unique dedication to your business
From this moment on, you can only focus on your business. It will be the platform that is responsible for collecting fees and distributing it to investors who have participated.
Types of crowdlending
Within crowdlending, there are several types of investment. These types can be differentiated according to who the borrower is, the lender, the purpose of the loan or its guarantees. We could distinguish the following:
- Loans with mortgage guarantee: These are loans with a mortgage guarantee.
- Loans to companies: It consists of loans to small and medium enterprises. More and more this type of crowdlending emerges.
- Commercial credit discount: It is about offering help when paying promissory notes and bills.
- Loans with collateral: In this case, the guarantee or collateral is movable property. Thanks to this, better loan conditions are obtained.
- Consumer loans without repurchase guarantee: These are loans to individuals for consumption. Having no guarantee of repurchase the capital invested is not guaranteed in case of default.
- Consumer loans with repurchase guarantee: We are facing the same as before. Of course, with a difference, by having a repurchase guarantee, our invested capital is guaranteed. It is the type of crowdlending with the most negotiation volume. At the profitability level, it is the most attractive type for lenders or investors.
Legal aspects of crowdlending
Before starting to invest in crowdlending, we should not overlook the legal aspects.
Perhaps, the legal aspect is the most important aspect. As in almost all sectors that grow a lot and offer the possibility of generating good returns, the legal aspect is essential.
If we know the laws that regulate this activity, we can invest our savings with great security. Otherwise, if we ignore this point, we will be an easy target to fall into scams.
In this sense, given that each country offers a specific regulation in this regard, we will name certain key aspects valid for any country in the world. That is, whatever the country in which the crowdlending platform operates, what legal aspects do we have to take into account?
- Authorized platform: The first and most important when investing in a crowdlending platform is to verify that it is an authorized platform. It does not matter if it is authorized by the British FCA, the CNMV in Spain or meets the AFICO standards in Mexico.
- Know the laws that regulate crowdlending in each area: It is true that it is something tedious and boring, but it will prevent us from more than one dislike. All the information we need to know is in the laws. In Mexico, for example, these platforms are regulated by the Fintech Law Decree. In the case of Spain, for its part, since 2015 they are regulated by Law 5/2015 on the Promotion of Business Financing.
- Taxation: It is not only important to know what the previous regulation is. Also, you have to know how the profits or benefits are taxed. In addition, it is also important to know, in case of being a borrower, how to include that in the income statement. Either at company level or at a particular level. In Spain, to give an example, as indicated by the LIRPF, the interest paid to the lender is taxed as return on movable capital. In this sense, each individual or company will have to inform what is taxation in their country.
Finally, although it is not a legal aspect itself, analyzing the trajectory of the company in which we will invest will always give us a lot of peace of mind. A company founded 10 years ago with a long history, with tens of thousands of investors and with thousands of projects completed will always be safer than a newly created crowdlending company.
Advantages and disadvantages of Crowdlending
Like everything else, investing in crowdlending has some advantages and disadvantages. Among the advantages, we could highlight above all the diversification and profitability. Meanwhile, among the disadvantages, we could highlight some risks inherent to investments in general.
Advantages of Crowdlending
- It usually has greater profitability than other financial assets of the same class.
- More diversification
- Investments with reduced capital.
- Lower costs for both the borrower and the investor.
- Less demanding requirements.
- Flexibility and speed in the process.
Disadvantages of Crowdlending
- Risk of default for the investor.
- Interest payments with the delay to the investor.
- Do not get all the financing that the borrower needs.
Tips for investing in Crowdlending
In addition to reviewing well all the legal aspects that we have indicated previously, it is necessary to have diverse considerations to invest successfully. Investing successfully does not mean always getting the profitability we expect. Investing in crowdlending successfully is to obtain sustainable profitability over time minimizing risks.
Some of the tips to invest successfully minimizing the risks are:
- Diversify your portfolio correctly: The diversification is not to put some capital in each investment. But put what corresponds according to risk and profitability. Investments with higher profitability and higher associated risks will require less capital. Thus, investments with much more security will require more capital, but in return, less profitability.
- Obtain the greatest amount of investment information: Whenever we are going to invest, not in crowdlending, but in any financial asset, we must analyze it. Obtain information, analyze it and draw conclusions. If necessary, contact an expert advisor on the subject.
- The most important thing is the risk: More profitability is not always better. We must never forget that the most important thing is to preserve our money. Profitability is important, but the risk is even more important. Therefore, minimizing the risk of our crowdlending portfolio should be our priority.
- Keep a record of our investments: It is advisable to create a spreadsheet to keep track of our operations. And, conveniently, put comments on why we made an investment. This will help us not to doubt when there is some kind of problem or to retire in time if necessary.