Crowdlending – an alternative for startups?
As crowdfunding and crowdinvesting, also the form of crowdlending is a relatively young tool of alternative finance. With its starting points in the UK and the US some ten years ago, crowdlending has slowly begun to conquer the minds of individuals in need of quick money in the rest of the world. It’s said to be used in order to, say, finance a new stereo, a car repair or needed maintenance in the house. But can this form of alternative corporate financing also be applicable for startups in need of capital?
At the very beginning there has to be a clearing point to make it easier to distinguish different wordings: crowdlending may also be denoted as lending-based crowdfunding. Setting all the known terms in context, there is crowdfunding, crowdinvesting (also known as equity-based crowdfunding) and crowdlending (lending-based crowdfunding).
The what’s and why’s
The idea behind crowdlending is that people, who normally wouldn’t be able to afford a loan at a bank or don’t want to go down that road, get the opportunity to substitute the bank with the crowd. With the platform usually being internet-based, a customer who wants to refurbish his or her kitchen, for example, can apply for a crowd-based loan on a crowdlending platform. The first of its kind was British Zopa back in 2005, which offered so-called peer-to-peer loans. Those are loans that are exactly what the name suggests: given to a customer by his peers, or in this case the crowd. The rest of the parameters work like those of an ordinary loan: There are ratings to denote the credit worthiness of a client, monthly rates to pay back the loaned money and also collateral requested by investors. And apparently, it works: In 2013, a volume of two billion dollars of private loans was managed by private lending world leader Lending Club alone. In Europe, British Zopa claims to have handled a credit volume of almost half a billion British pounds in 2013, thus being the European market leader, although only being open to British residents with a UK bank account.
But all these figures and success indicators let the question arise if also startups are able to get financing via a crowdlending campaign. If thousands of private customers have already succeeded in raising funds for buying an electric guitar or for paying for maintenance on their heating system, why shouldn’t an innovative venture be capable of doing so, too? So-called peer-to-business loans exist, where the lenders of funds are individuals but there are entrepreneurs or businesses on the receiving end. Still, differences to crowdfunding and -investing exist and revolve mainly around the contributed volume.
Small enterprises, not the big fish
In fact, German crowdlending portal auxmoney offers small enterprises the possibility to become a client and initiate a crowdlending campaign on their website. The maximum amount to be raised is limited to 25.000 euros there – the same amount that is the limit for peer-to-peer loans in the individual branch. Due to the low amount that can be lent by the crowd, this option consequently applies more to self-employed individuals and economic one-man shows than big tech startups or capital-intensive ventures in need of money to fund a prototype.
A crowdlending platform from Estonia operates across borders – in Slovakia, Spain and Finland. Bondora (formerly known as isePankur) offers individual loans up to 10.000 euros for up to five years but this only works for individual persons in the above-mentioned four EU states.
Other examples would be Polish platforms Kokos and Finansowo who lend on a domestic basis, given the fact that their websites are not available in English. An example for a failed peer-to-peer lending venture is Hungarian Noba: The social lending platform fell prey to Hungarian banking law that claims lending for interest as a privilege exclusively reserved for banks and brought the platform down a few years ago.
Legal pitfalls for the platforms themselves
Since lending money and getting interest in return is considered as banking and loaning and requires appropriate licenses not just in Hungary but in most European countries, legal restrictions are sharp. For example, in 2009, a crowdlending platform named bankless-life.at tried to get things going on the Austrian market. The outcome: since they didn’t team up with a partner bank for collecting and dispersing the money but were doing these things themselves (though lacking the needed banking license) they were shut down by federal financial authorities because they were infringing the banking law.
Still, crowdlending offers seem to be gaining certain, be it gradual, popularity. Lendico is the first operating Austrian crowdlending platform, and it only opened this past March.
The bottom line is: As with any other form of alternative financing, caution is advised. Given the focus of most crowdlending platforms more to individual loaning, the cap on the maximum amount to be raised and, still, some legal uncertainties, the tool of crowdlending clearly falls behind the much more flexible and developed forms of crowdfunding and crowdinvesting. While this form of alternative corporate financing might be adequate for small business owners and one-man shows, a venture that is looking for some more attractive capital raising forms should be looking elsewhere.