What is crowdfunding and how it differs from crowdlending

The terms crowdfunding and crowdlending are in fashion and have become part of our everyday vocabulary. 

In fact, it is easy that you have heard that many solidarity or cultural projects (book editions, record publications, celebration of music festivals or poetry recitals, etc.) raise funds or are financed, totally or partially, through the collective and network cooperation through Internet platforms. This is popularly known as ‘ crowdfunding ‘. 

But crowdfunding and crowdlending can also be applied to the business world, including those businesses linked to the real estate sector. 

We are talking about new formulas that have two objectives: to obtain financing to develop a project or start a company, or to make an investment that brings us long-term benefits. 

It may interest you : What do I need to know to invest in real estate?

Below we will tell you in more detail what is crowdfunding, what is the difference between crowdfunding and crowdlending and which option is more interesting for you. 

Crowdfunding or crowdfunding is a collective financing network , usually online, that is used to finance a certain project through financial or other donations. 

Currently, there are different types of crowdfunding. 

The most common and well-known is the donation / reward model . That is, those who make contributions do not expect benefits in return or receive a reward for their contribution. In these cases, the money is not invested: it is used to develop the project .

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But crowdfunding can also be a form of investment. In this case, we distinguish between « equity crowdfunding «, which consists of buying part of the capital of a company to become a shareholder , and « crowdlending» , a type of mass financing, through loans, in exchange for a interest rate for borrowed money.

Crowdfunding models: definition of equity crowdfunding and crowdlending

Equity Crowdfunding: become a shareholder of a company 

Equity crowdfunding is one of the alternative financing methods that has been gaining more relevance in recent years. 

Like conventional crowdfunding, the essence of equity crowdfunding is crowdfunding. However, in this case, the money is not invested in an innovative project or a start-up , but in an already established company . In this way, individuals can make investments, a priori profitable, without having to put their money at risk. 

In this sense, equity crowdfunding is interesting because it is not necessary to have a large capital to become a shareholder in a company. 

In addition, this formula facilitates diversification and allows making small investments with which we can obtain benefits in a short period of time . 

Equity crowdfunding also has some risks , since you do not have any additional guarantee that ensures the recovery of the invested funds. The purchase of capital is done without a fixed time horizon, and you will only have benefits if you decide to sell your participation . However, if the company does well, you can multiply your investment in a short time.

Crowdlending: loans financed with private equity

On the other hand, we have crowdlending, a completely different investment formula. 

In this case, the investor (for example, you) lends money to a person, company or project that has the obligation to return it with a defined and specific payment schedule, adding a fixed interest rate to the invested amount.

Basically, what we are talking about is a loan financed with private capital , since the return of the investment is made in monthly installments from the moment the loan is formalized.

Crowdlending emerged as an alternative when, after the last economic crisis, banks began to request too many guarantees, and entrepreneurs, companies and individuals had to find new methods to get money. In addition, thanks to the Internet, online communities have been created that connect individuals who want to invest and companies that need financing , and that make the process transparent.

Normally, crowdlending is a valid formula for companies or projects developed or that are already generating benefits with their activity. The reason is that many new projects do not comply with this rule and could not assume the payment of the monthly installments to the investors.

Differences between crowdfunding and crowdlending

Equity crowdfunding and crowdlending are two ways of investing / obtaining financing that, despite their similarities, have many differences. Next, we analyze the most important ones: 

Investment risk: high vs. minimum 

Investments through crowdfunding have a high risk : you will only get your investment back if the project in which you have “placed” your money succeeds. What’s more, the return on investment , if any, occurs in the long term . 

In crowdlending , on the other hand, the risk is lower . From the first month, the investor receives the agreed payments and the possibility of non-payment is minimal , associated only with very negative project results.

Benefits: variables vs. fixed 

As long as the project you have invested in works, you will make a profit. In the case of crowdfunding, your benefits are variable and will depend on the success of the project: they can be high or nil. In the case of crowdlending, you will have fixed and secure benefits that will be the interests that have been agreed upon when signing the loan. 

Guarantees: void vs. elevated 

In the case of crowdfunding, there are no guarantees of investment recovery , and the investor must trust his intuition and the possibilities of the project. In crowdlending, there are all the guarantees previously agreed by contract.

What alternative am I interested in? 

Normally, for the creation of companies or start up , equity crowdfunding is requested , while crowdlending is adjusted to consolidated projects or with the generation of predictable benefits. 

In any case, whether you are looking for financing or want to invest, you must take into account several aspects before opting for one or the other. 

See also : What do I need to finance the purchase of a home?

For example, crowdlending allows more detailed control of how the project works , since there is a relationship between the company and its investors on a monthly basis. 

For this reason, in projects financed by crowdfunding it is especially important to have a good communication and marketing plan , perfectly detailed, so that investors know the potential benefits of the business they are going to be part of without these being still tangible.

This is another of the great differences between equity crowdfunding and crowdlending: in the first case, the investor is part of the company by investing their money and can intervene (in the proportional part) in the development of the project, while in crowdlending the Investor receives money but will never be the owner and, therefore, will not be able to make decisions related to the operation of the company. 

If we seek financing by crowdlending, we will have to show that we are solvent and that we are going to repay the loan in time and in the way we have agreed.

Both crowdfunding and crowdlending are two good alternatives to invest in the real estate sector in a profitable, easy, accessible and transparent way. Both allow the use of technology to bring together small investors who, together, generate a “financial muscle” capable of investing in projects normally reserved for professional investors. This has been a real revolution in the real estate sector and has opened the way to new interesting projects. 

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