Crowdlending is a family of participative financing, or crowdfunding, dedicated to the financing of companies and real estate projects. It is remunerative and allows you to boost your investments. The little guide to take your first steps with confidence.
With the general decline in returns on most investments, many investors are now tempted to look elsewhere for new, more profitable but also more atypical investment solutions. It is to meet this demand that many solutions have recently appeared on the market.
Crowdlending is one of these new investment solutions, but it is necessary to appropriate the keys to them in order to take full advantage of them. For we must not forget that the corollary of more original and profitable investments is that they are often riskier and require more control on the part of investors.
What is crowdlending?
Crowdlending is a sub-family of a broader investment category more commonly known as Crowd Funding. In UK, it is more commonly referred to as “Financement Participatific”. It is a financing technique that consists of bringing together several people around a project in order to have it financed.
There are different categories of participative financing.
Crowdlending is the one that allows you to lend money to companies to finance their development or to real estate developers to finance the construction of buildings. In exchange, you receive interest paid monthly or annually as if you were a bank.
This investment technique has many advantages for both parties.
It allows individual lenders to gather very easily around a project when they don’t know each other thanks to the power of the internet.
They can thus occupy a role almost identical to that of a bank thanks to the change in regulations that took place in 2014 and then in 2016.
They obtain interest rates much higher than the majority of investments and therefore more profitable.
Crowd Lending offers a very fast execution time because the agreements are reached within 48 hours compared to several weeks on the banks’ side. The same goes for the collection of funds, because the collections often only take a few hours.
It allows the company to finance all kinds of projects by freeing itself from the constraints generally imposed by banks: project theme, guarantee offered by the company or its manager, seniority, amount borrowed.
Finally, crowdlending can be considered a very good deal that reconciles the interests of all parties. For the time being, however, the market is rather modest with £224M of funds collected in 2017 (companies + real estate). However, annual growth over the next 5 years is expected to be around 50% per year.
The most important reason to invest in crowdlending is of course the level of the proposed gross annual rates (4% to 12%). This is much more than any other investment offered by your bank, with an average of around 7% for corporate crowdlending and around 9% for real estate crowdlending.
Even if these remunerations can appear very interesting, even abnormally high, they must be put into perspective.
First of all you have to subtract the famous 30% Flat Tax which will free you from the tax”.
Secondly, it is important to understand that most Crowd Lending business loans are mostly amortized on a monthly basis, so the actual cost to the borrower is much lower than it seems. For the lender, this requires them to continually reinvest the money earned to maintain approximately the same levels of compensation.
With regard specifically to real estate crowdlending, which is even more remunerative, it is in fact a less costly financial arrangement for the borrower than it seems. Real estate developers will pay very high interest on a very small part of the money they need to finance their construction projects. But thanks to this loan, they will be able to obtain much larger complementary loans, which will themselves be at very low levels.
How do you go about making your investments?
Like all financial products that are more remunerative than traditional A-books, this investment involves a certain amount of risk, but that doesn’t necessarily mean that they are not manageable. You have to be aware of these risks and identify them.
The most important of them is, of course, the fact of not being able to recover the interest or, worse still, the capital invested in one or more files. This risk is real but its scope can be limited if you have weighted your investments correctly.
To begin with, I would advise you to put only small amounts of money in to see what’s going on.
The crowdlending company is open from £20 per investment. So it will be up to you to determine what you think is fair to invest in relation to your financial possibilities.
In any case you should spread your sums well in order to reduce your exposure to the same file as much as possible.
For example, if you have £1000 it is better to invest on 20 projects at £50 than on 2 projects at £500 each.
To date, about ten crowdlending Enterprise platforms share 90% of the market.
Even if all the platforms work in the same way, each one has its own offer and its own positioning. This results in different targets and markets with different risk profiles.
In fact, some platforms offer attractive remuneration on riskier dossiers, while others focus more on simpler, less lucrative dossiers.
The same is true for loan maturities. For the same loan, a longer term results in a higher remuneration than for a shorter term.
The default rates presented by the platforms can be a good starting indicator to guide your investment choices. But be aware that in order for them to be fair to you, you should strictly replicate your investments (number of files and distribution of your investments) in the same way as what the platforms offer. In reality this is strictly impossible. Thus the real rates of each one will actually depend on the investment choices you have made yourself.
The following table shows you, in an indicative way, the level of risk you should expect when you go on the different crowdlending platforms.
After 3 years of experience, my personal preference goes more towards Credit.uk, Look and Fin and the Entrepreurs who offer the best compromise between risk and level of remuneration.
The Prexem, Pretup and Lendopolis platforms appear to be the most dangerous in terms of the types of files offered but they can also offer very good opportunities.
For the real estate crowdlending part, to date, actual defaults are very low and there are fewer defect spreads between the platforms, which are globally all equal.
The most important in volume collected are Wiseed and Anaxago. But Lymo, Homunity, Koregraf or Fundimmo also offer the possibility to invest on very good files without any problems to date.
Attention however: the real estate crowdlending requires a starting stake of £1.000 per file what does not allow everyone to be able to position itself. You will always be able to do it afterwards once you have mastered the business part.
Beyond the risks already mentioned above, such as the bankruptcy of the borrower, there are other risks linked to the very nature of real estate development, i.e. the difficulty of going to the end of its achievements for technical, administrative, commercial questions…
What are the good practices to be adopted to avoid making mistakes?
Earning money from crowdlending takes work. So, if you don’t want to invest in projects that are too risky, you will systematically have to do a little analysis work that will seem a bit tedious at first but that, with experience, will become faster and more efficient.
I suggest that you follow a few rules that I’ve been able to put in place. If you apply them, they should allow you to minimize the risks when you invest.
Avoid companies that rely on a key man
This is often the case in small structures. The sustainability of the company rests on one man: the founder-manager, the one who has the know-how of the company.
The more the company is dependent on the personal action of the manager, the greater the risk in the event of an unforeseen health event or, even worse, in the event of death.
Therefore, prefer companies with several partners and preferably in the prime of life.
Look at the consistency of the leaders’ backgrounds and their reputations.
More than the level of education of the managers, the most determining factor is the adequacy of their personal and professional background that led them to join the company. The more consistent this element is, the lower the risk.
Thus, a family company, which has a know-how from father to son, is less risky than any other company because the managers feel they have a personal responsibility to carry on the work of previous generations.
In the same vein, a quick Internet search of reputations will quickly help you to see if the managers have any pots and pans behind them.
Be careful with companies that depend on a market or customer
Putting all your eggs in the same basket is never good. It’s the same for a business.
If it is dependent on just a few customers, the risk will always appear greater than if its business is spread over many customers.
The loss of a contract is a normal part of doing business, even if the business relationship has been in place for a long time.
Pay attention to companies dependent on the state or local authorities.
Public principals are deemed to be bad payers. Not that they do not honour their postmen, but rather that they often pay very late because of administrative mishaps.
It is not uncommon for companies to encounter difficulties due to delayed payments from their customers. This can simply drive them out of business.
Analyze the key points of the company’s accounts
Without going into technical details, you should know that before investing, you will always be presented with the important figures of the company’s activity. There is no need to be a financial expert to understand in the tables obtained the elements that may call for vigilance.
- Companies structurally in loss even with a business plan to make you dream.
- Companies with a rollercoaster ride, sometimes good, sometimes bad.
- Companies with negative cash flow or huge working capital requirements in relation to their activity.
- Projects that do not immediately bring value to the company, such as the renovation of premises, changing furniture or computer stations.
- Companies that already bear heavy financial burdens such as a large bank loan for example. I don’t want my loan to actually be used to pay off another loan.
Avoid lending several times to the same company.
It is always the same rule that should apply: spread your risks as much as possible. To do this, only lend to the same company once. Unless the company has already repaid its previous loan.
Indeed, some companies tend to abuse crowdlending by multiplying loans on different platforms. If you follow this pattern you risk being overexposed to a single company, which would be dangerous in case of default.
Beware of very fast growing companies
We tend to forget this, but some companies are failing because of uncontrolled growth.
For example, when growth exceeds 50% per year, there is a high risk that the working capital requirement will not be sufficient. This is particularly true when they are very capital-intensive with, for example, the purchase of large stocks that will be sold and paid for at distant dates.
For those of you who would like to know more about this trendy investment, I invite you to buy my book “Boost your savings with Crowdlending” available exclusively on Amazon.
Through 13 chapters, you will discover all the aspects of this investment, from law to taxation, including a detailed analysis of more than 20 platforms, the different techniques used and my detailed advice after 3 years of investing in more than 400 projects.