The concepts of crowdfunding and crowdlending began to gain popularity at the beginning of the 21st century, especially in Anglo-Saxon territories. However, such initiatives have existed even before that time and have provided us some original and fascinating models to look at.
Although both terms are quite similar in meaning, there are still some important differences. The primary discrepancy between crowdlending and crowdfunding lies in the purpose sought by the participants of each operation and the expected return on their investment (ROI). In both cases, we have a group of people – a crowd – gathered around a common idea, providing capital to materialize a particular project. When we talk about "crowdfunding," we refer to a group of people who, with their contribution to the project, become investors and acquire a business. And within this modality, also known as "crowd equity," there are different possibilities to obtain the expected return, such as a percentage of the company's turnover or net profits.
In "crowdlending," the investor lends his money to recover it with the agreed interest later. Crowdlending makes a lot of sense because it puts borrowers and lenders in direct contact, eliminating the central entity that usually is represented by a bank. If the bank charges 10% interest on a loan, which it makes with your money, and it gives you 2% interest on your deposit, doesn't it make more sense for two parties to leave out the bank from their arrangement and achieve better economic conditions for both sides? If they agree to a 6% loan, for instance, the borrower will be able to get a cheaper loan, and the lender will see a higher return, keeping more of their money in the bank.
The Internet has popularized the crowdlending and crowdfunding industry to the extent that it grows year after year at a double-digit rate. The Internet has made it possible for anyone in the world to become an investor of crowdlending or crowdfunding from home. On the other hand, it gives entrepreneurs new forms of financing beyond the traditional channels.
The industry specializes exclusively in very specific niches of the market, such as projects related to medicine, real estate opportunities, and loans to unbanked people in developing countries.
We can see that there are specific donations aimed at supporting charitable causes. These actions, which have existed for centuries, brought together a group of people, united by the same purpose of making small contributions, expecting nothing in return rather than seeing the success of the goal.
However, the concept of social enterprise has promoted a new modality emerging strongly in recent years. A social company differs from third sector organizations because they have a declared profit.
However, unlike traditional companies, they are focused on solving a social problem at a global level, combining in the same project the possibility of being profitable and sustainable while trying to generate a social, economic, and environmental impact on the planet. They can also be identified as triple-balance sheet companies. An option that gains more adherents every day because it gives the same project the personal satisfaction of contributing altruistically to a noble cause with obtaining an economic return for our collaboration.
In this sense, the world of impact investing, which has been growing extraordinarily in recent years, is committed to creating an extensive network of investment funds, acceleration processes, awards that recognize the impact, and functional and operational social enterprises.
Crowdlending is beneficial for both the investor and the borrower. Firstly, because the lender can choose an interest rate that fits their investor profile; it will be higher with a project that assumes a higher risk or opt for a safer option with a lower interest rate. They can also choose to finance projects with prior professional knowledge or initiatives aligned with their values. In other words, the investor has full freedom of choice.
Secondly, the investor does not have to lend the total sum. They can divide their budget into several projects and thus minimize the risks.
Third, it is fairly easy to get started with crowdlending. The EU Directive requires that "before an unsophisticated investor makes an investment of an amount exceeding EUR 1000 or 5% of its net worth, whichever is higher, the crowdfunding service provider shall ensure that such investor:
However, some reasons for not qualifying for a bank loan are generally considered safe for the investor. A bank may consider the borrower's business idea too risky, although if the investor sees potential in it, there is nothing wrong with backing the business. A person may also be paying off a mortgage or other bank loan at the time, and some banks will not make multiple loans at once. Another common reason someone does not qualify for a bank loan is too young an age. Finally, financial institutions may not grant funds even to people with adequate credit ratings during the recess.
In addition to the potential risk, investors should be aware of the lack of government protection. Most government laws, including European Union legislation, do not provide insurance against crowdlending. It is the responsibility of the lending platform to help the parties resolve their issues in the event that the borrower defaults on the loan. In addition, some governments require lenders to meet certain requirements to qualify.
Subsequent evolution of donations can be found in crowdfunding, known as "patronage." For the contribution made, the patron receives an incentive or a reward from the promoters. These projects are often very difficult to use traditional funding and are closely linked to artistic initiatives. For their contributions - and depending on their size - patrons will receive one or more products; services associated with a future project; or even exclusive personal experiences, which are not easy to quantify but act as an incentive for the investors.
Atendiendo a lo escrito con anterioridad podríamos recoger las siguientes modalidades.
Crowdlending can be very profitable and constitutes a very interesting investment alternative to diversify our portfolio. If we think about it, it makes all the sense in the world for the parties involved. Developers have a different alternative to traditional financing and investment channels where they can obtain financing at cheaper rates than we can get from banks. For investors because they can opt for higher yields than those currently offered by any bank in a traditional current account.
Crowdlending platforms open up a whole new world of business financing, but they can end up being a confusing world for tax purposes. Revenues are not like sales in the traditional sense, and the people contributing are not shareholders. So how should you handle the income earned?
Income received is taxable income, so it must be declared as income in the year in which it is received.
If you have additional questions about taxation contact us at support@ethichub.com
EthicHub is a ReFi (Regenerative Finance) protocol that helps unbanked farmers access capital at low interest rates in a win/win model where all stakeholders benefit from the interaction. Its crowdlending platform was launched in June 2018, and to date (January 2023) it has brokered more than $3M in microcredits to more than 600 families in 5 countries.
