Crowdfinancing: what is it and how does it work?
Crowdfinancing is a generic term for raising capital online. Some of the best-known types of crowdfinancing include crowdfunding and crowdinvesting.
What is the difference between crowdlending and crowdfunding?
The main difference between crowdlending and crowdfunding is the type of return or reward investors receive for their investment. With crowdlending, the lender receives interest. The process is regulated in that interest rates and repayment terms are agreed and P2P loans are subject to the Consumer Credit Act (link not available in English).
With crowdfunding, lenders invest in exchange for some form of reward or return. The rewards can be quite different in nature, and there may be none at all if the project fails. Crowdfunding projects are often launched in order to found a company or manufacture a product.
If they are successful, investors may be rewarded with a prototype or a share of equity in the company, for example. With crowdfunding constantly increasing in popularity, however, the scope of projects and initiatives financed in this way is changing.
Peer-to-peer or P2P loans
Peer-to-peer (or P2P) loans are arranged directly between lenders and borrowers without involving a bank. They are the most common type of crowdlending. The lenders can be private individuals or legal entities.
On crowdlending platforms, lenders and borrowers have the opportunity to request financing or invest in projects. As with conventional loans, profit is generated by the application of interest on the money loaned or invested. The platforms themselves are financed by fees. Crowdlending platforms have been regulated by the Consumer Credit Act (KKG) since 1 April 2019.
There are three types of crowdlending:
Lending to private individuals (P2P or B2P)
Lending to businesses (P2B or B2B)
Lending/investment to finance property
In the case of property financing, the parties can be private individuals or businesses on both sides.
P2P lending exclusively for the consumer credit market is also referred to as consumer crowdlending. Consumer crowdlending platforms in Switzerland include Creditfolio (not available in English), Lendora and Splendit. Splendit is an educational loan that is not subject to the KKG. Platforms such as Lend, CreditGate24 or cashare offer both consumer and business crowdlending, i.e. corporate loans.
Another form of crowdlending is peer-to-business lending (P2B). Under this model, private individuals lend money to businesses, usually SMEs.
How does a peer-to-peer loan differ from a standard personal loan?
The main difference to traditional personal loans This is because no third party (i.e. a bank or credit institution) is involved in the granting of credit. P2P platforms managing P2P loans are financed by fees. The fees are usually deducted from the total amount when the loan is paid out. The lenders receive interest on the sum of money loaned.
With standard personal loans, borrowers receive money from the capital of the bank or other lender. An interest rate and schedule are agreed upon for the repayment. Lenders are compensated in the form of interest.
