The Risks of Crowdlending
When you hear of crowdlending, your first thought might jump straight to crowdfunding. “Is there a difference?” You might ask. There is a great difference between crowdfunding and crowdlending. The difference is in the name, really. When you set up a campaign for crowdfunding, you might be familiar with websites such as Kickstarter or Indiegogo as a means for people to connect with a specific audience with their idea, invention, product, plan, etc. in order to receive funding from people with the promise of certain key rewards once certain milestones have been reached or if a specified amount has been provided by each individual.
With crowdlending, it’s working in a completely different manner. Crowdlending is basically putting your company into debt in order to receive a certain amount — hence why it is called lending. You are being funded by another party, this is true, but the lending aspect comes from the fact that you will need to pay back the amount that you were lent at a later date. Crowdfunding, on the other hand, does not usually require you to pay back later on since the lenders through crowdfunding were given a different set of rules and either received a compensation of some sort or lent the money out due to their belief in the product.
That being said, why would crowdlending be a good idea for you to consider for your company? Since finding capital for a startup can be a daunting task, something like crowdfunding isn’t always an option. You might not have a very big audience to be able to get to your goal for funding for sure. If you don’t already have a following that is involved with your startup, then it’s likely a bunch of people you don’t know are going to get behind your idea from the get-go. With crowdlending, it’s not about winning over the opinions of others. Instead, it’s about setting a contract and sticking with it to ensure a more likely chance of being funded.
A benefit to crowdlending is the fact that it is a new type of lending. You are looking at much lower levels of lending amounts required as compared to 2008. Banks are much easier for start-ups to work with right now than they once were. This higher level of cooperation is necessary for the economy since start-ups are one of the main ways new jobs are being generated nowadays. This method may also generate a kind of capital for those types of communities who have been turned down without a chance to prove themselves by more traditional means of lending. Using this form of lending has another benefit that not many really consider. You will have the potential to incur much lower interest rates and fees through crowdlending.
All the pros having been said, there are definitely certain risks to keep in mind when it comes to crowdlending. Crowdlending, much like any other type of lending, is risky for investors. Despite this risk factor, you may be facing much less risk with this sort of method, since there is a community aspect to back it up in case something goes awry. Another aspect is the fact that lenders, even for crowdlending, use the same methods that something like banks would use in looking up viability in a hopeful start-up. This includes looking up the individual business owner’s credit whose name will be run through the deal with the lenders. Tools like Experian, Dun and Bradstreet are used to check on the credibility. They will also use the same servicing type models, such as UCC filings and the like.