This text will explore an important segment of the FinTech innovation spectrum, namely crowdlending. We aim at explaining how it works, giving two examples of platforms and touching their respective target-audiences, and finally mention what this brings as an opportunity to one common investor, especially one with little experience.
Doing a quick research on the background of crowdfunding – which consists of a larger number of people joining resources to fund a project – you can easily see that the idea is not new. Our focus, however, is centered on how new technologies have enabled new ways to get financed by the crowd, and how this process creates new investment opportunities.
Let’s start by the funded project perspective for two platforms.
Personal projects reaching for the crowd
One of the first local FinTechs I heard of when I arrived in Düsseldorf during 2016 was Auxmoney. This company helps individuals with a personal project in need of financing – regardless of it being a new car, some needed repair in your home or refinancing of previous debt – to borrow from the crowd.
Looking at the financial and technical side of borrowings, credit ratings are self-made by this FinTech and ranges from AA to X (I personally find this last one scary, so I mostly stick to E or D+ projects). Tenors are from one year to 84 months, and interests are proportional, ranging from a couple of percentage points to 16,9% per annum (p.a. for short). Unlike banks, Auxmoney does not rule out students, freelancers and other borrowers without guaranteed income, but similarly to other financial institutions those with a bad repayment history cannot get a credit.
This FinTech makes use of Technology to allow borrowers who might have been excluded from traditional banking loans, including those without employment income, to get the funds they need for any personal project. So, next time a German friend yours mentions they would like to get some money for a personal project, but banks don’t seem able to help, do mention this FinTech company from Düsseldorf and they might have found a solution in the crowd.
Mittelstand goes to the crowd
A very different approach to crowdlending is that of Kapilendo. This Berliner FinTech helps small and medium-sized companies (SMEs) get their investment projects financed by the crowd. Their borrowers are consequently companies often counting on some traditional financing, but seeing an opportunity to make themselves better known while raising funds with a wider public.
In my experience looking at Kapilendo projects, their success rate seems quite impressive. They boast a number of extremely quick financing rounds, and at least part of this is due to a high standard regarding the communication of projects, and announcing within their network exactly the minute from which an investment will be possible. This creates a sense of scarcity and all but guarantees that projects will get visibility and often get financed well beyond their minimum targets, in many cases all the way to the maximum amount the company would accept to borrow.
Another interesting feature that Kapilendo offers is a success rate in addition to regular interests. This allows investors to share in good results that the company might have once they implement their plans, and recent examples have offered up to a 25% bonus. This helps align the incentives for borrowers who can pay interests proportional to their success, as well as for lenders who are somehow betting that the company will put the funds to good use, this allows for sharing the upside of the company’s success without giving out actual company shares.
Whereas it is still not clear to me what the main motivation is for a company to seek crowdlending is, motivating them to seek Kapilendo or others rather than stick to traditional financing (research will be done for a future post), I can easily recommend to any high-growth SME to look into crowdfunding at least as an alternative that might actually offer a different mix of requirements, costs and benefits than a normal bank loan.
On offer for crowinvestors
The very first benefit for most crowd investments is how small the first required amount can be: a meager 25 Euros is the standard minimum to be allocated to a supported project on Auxmoney; while on Kapilendo you can support a project with as little as 100 Euros. Beyond the amount itself, the possibility to invest little is in my view extremely healthy for more than one reason.
First, for those with little experience investing, lending to unknown people or companies can be quite daunting. When the minimum amount to be invested is small enough, more people are comfortable to bear the risk of trying this type of investment, so there is a component of democratizing investments. Moreover, even for less risk averse investors, a healthy financial portfolio will be composed of different instruments, and the granularity offered by small investments through crowd-platforms enables such fine adjustments.
My personal experience as an investor shows that crowd-investments pay at the moment a few times more the interest a fixed-income bank product such as Tagesgeld or Festgeld in Germany offers, but not as much as my portfolio of stocks paying variable income. This makes sense considering that – at least so far – I had no defaults on my crowd-investment, which can indicate that their risk is actually lower than many fear.
Some other features investors might want to keep an eye on are:
– Auxmoney offers an automatic-investment (and re-invested) tool, which is smart and probably makes it much easier for beginners. I personally find that option less attractive than selecting the projects myself. If you are a curious investor, who tends to check on their portfolios regularly anyhow, and like to customise projects, risk ratings and tenors, consider investing manually. Not only is the manual alternative easy, but it helps you get a better understanding of projects, borrowers and even of the platform itself.
- The only downside of this platform for me is that the numbers shown to me after login do not match my own calculations of average interest in my portfolio, or amount invested so far. The information is all there correctly, but it’s far from the way that I would display it to maximise clarity, seems like (could be my perception that) the numbers are chosen to look better than they actually are.
– Kapilendo project descriptions are quite elaborate and give you a good glimpse into what company does, as well as what they plan to do with the additional resources from the crowdfunding. Additionally, and we will detail this in a future post, unlike other platforms Kapilendo allows companies to lend through their platform, calling those institutional investors.
Please note that these are not at all the only crowd platforms out there, there are many more and I plan to write more about that in the future. These are two of the ones I know more about for now in the country I live in, but feel free to get in touch if you want me to take a look at any given crowdfunding platform.
One great feature of crowdfunding is that the investing is mostly done online, so it will be part of my effort to slowly look into other countries with interesting crowd-platforms, so keep an eye on future posts.