Lending crowdfunding: what is it and how does it work


20 December 2023 - 17:00

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What is lending crowdfunding, or P2P lending, and how does it work? Investment methods, advantages, costs, platforms. Everything you need to know about lending to businesses and individuals.

Lending crowdfunding: what is it and how does it work

Today, businesses and individuals who need financing do not necessarily have to turn to banks, as they can count on new alternative, rapid, and flexible sources of crowdfunding.

One of these, which falls within the macro-area of Crowdinvesting while presenting peculiar characteristics, is lending crowdfunding, also known as social lending or P2P lending.

The lending crowdfunding market has seen growth in recent years and is a valid solution to help companies and entrepreneurs, often overlooked by traditional institutions, in their growth path.

Research by the Crowdfinvesting Observatory of the PoliMi School of Management revealed that people and businesses that resort to lending crowdfunding do so mainly for the speed of disbursement given that they manage to obtain loans in a very short time, for transparency and simplicity.

From the point of view of the lender (which can be both private and institutional), it is a form of alternative finance that allows you to diversify your investment portfolio by making available the possibility of actively contributing to the growth of the entrepreneurial fabric and the real economy. Other advantages concern returns, as the loan interest rate is higher than that offered by the banks, and the absence of management costs for investors.

What is lending crowdfunding

In detail, P2P (peer-to-peer) lending means the provision of a loan through online platforms.

Unlike equity crowdfunding, which allows you to invest even small sums in startup and SME projects in exchange for shares in the company, lending crowdfunding consists of lending money to people or businesses looking for funds for personal or professional growth projects, in exchange for interest and reimbursement of capital.

In the case of crowd-lending, the money is lent to the applicants, who through the specialized online portal can carry out the project and return the money once completed.

These platforms have the role of bringing together supply and demand, and that of selecting, classifying, and approving the projects for which funding is requested; they organize the financial flows (disbursements and refunds) and, in the event of non-payment, they deal with the credit recovery process.

How lending crowdfunding works

The person or company that needs a cash loan to carry out a personal or business project requests it on the online platform. Here lenders invest their savings by lending them at higher interest rates than those offered by banks.

For applicants

Applying for a loan with crowdfunding lending is simple. Connect to the marketplace site, enter the required data, and wait for the platform to be evaluated. Companies must have requirements, in addition to creditworthiness, but these depend on the portals to which they are addressed.

Generally speaking, companies can request financing from a minimum of 30,000 euros up to 3 million/3 and a half million. The duration of the financing varies based on the reference platform.

After passing the preliminary analysis (generally the response arrives within 48 hours), the platform can carry out a more in-depth evaluation of the project and make the final offer within a maximum of one week. Once the financing contract has been signed, the project is published on the online platform and the company receives the amount directly into its current account in a few days.

According to the agreed installment plan, the platform will always withdraw the installments from the applicant’s current account every month.
As regards costs, the submission of a loan request and the analysis of the dossier by the portal’s analysts are free, but there are opening commissions contextual to the disbursement of the loan, and those of management, charged on a monthly basis.

For lenders

To be a lender you must sign up to the platform by entering your personal and banking data with a quick registration, define your offer, and make the first bank transfer.

Important: peer-to-peer lending is a form of investment and as such exposes you to the risk of losing the money lent (the company can declare bankruptcy, not repay what is owed...). It is therefore advisable to spread loans across multiple projects in order to diversify the portfolio and lower the risk.

Likewise, it is advisable not to borrow too large sums that may go beyond your repayment capabilities.

Original article published on Money.it Italy 2019-05-29 09:49:00. Original title: Lending crowdfunding: cos’รจ e come funziona

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