Crowdfunding and crowdlending have one thing in common: they are participatory investment techniques. Crowdfunders can pursue different goals: they can make a donation without waiting for a return, they can do so in exchange for a product or service to be financed, they can borrow money to finance a project or they can take an equity stake in a company. It is these last two situations that interest us here. There is a big difference between crowdfunding and crowdlending, which will be explained in this blog.
Crowdfunding is an investment in a company in the form of an equity stake. The investor then owns a part of the company, in the form of shares or share certificates, in exchange for the amount he has paid. He thus expects to receive a dividend or a capital gain from the sale of his shares.
Crowdlending is a system based on the principle of interest-bearing loans. The investor finances the project of an SME in exchange for a return on his loan. The financing is open during a certain fundraising period. Crowdlending is therefore an alternative means of financing to the banking sector. For the investor, the loan gives direct access to the company at an interesting interest rate.
The yield, the profile of the issuers, the nature of the instrument, the average ticket, the taxation, … are all particularities that make these two types of capital or debt investments truly different choices.
In Belgium, the FSMA (Financial Services and Markets Authority) has recognised several operators. First, there are the 7 alternative financing platforms under Belgian law: Lookandfin.com, Ecconova.com, Beebonds.com, Spreds.com, be.lita.co, Winwinner.be and Participate Today. Then there is Bolero-crowdfunding.be, an alternative financing service offered by a Belgian bank (KBC). As a reminder, the FSMA is taking over 3 other players from another member state of the European Economic Area, who are currently not very active: Raizers.com (FR), Crowdcube (GB) and Hands-on (NL).
These various platforms are accredited to offer investment proposals to private savers as part of their activities.
Today, digital platforms have become the norm, where companies and their projects are presented in an understandable way. Access to investments is simple, transparent and efficient. The selection, auditing and rating of the companies’ projects are taken care of by the platform. The platform shows investment opportunities. After the investor has created an account, all he has to do is find his investment or loan project and click to invest. The projects are presented in the form of a sheet including the return (3 to 12%, depending on the risk) and the duration (from 6 months to 5 years, in general).
It is therefore an excellent opportunity for savers to obtain an attractive return by investing directly in a project or a company that they choose. It is an act of direct participation in the economy. However, one principle of caution still applies: diversification. Given the often very low investment threshold (sometimes less than 1.000 euros), it is easy to carry out a prudent and active management of the amounts invested. It is important to remember that the savings are coming directly into the hands of a company to cover the needs of the project it is financing. There is a risk, and it must be managed!
Crowdlending platforms pay attention to their reputation and analyse the files submitted to them seriously. They inform the investor by means of a financial descriptive note and an information note that meet a legal requirement, even if the information note is not checked by the FSMA.
Funding through a platform is not “easy money” for a business. All platforms want to reassure investors and, like banks, will seek guarantees from the borrower. Here, for example, one can find a guarantee from the entrepreneur, a transfer of debt, a pledge of goodwill, a mandate or a mortgage, credit insurance coverage, etc.
But unlike banks, crowdlending platforms are more willing. They lend more than what the banks can offer and sometimes even go so far as to replace them in certain projects. They each have their own specificity. What is certain is that all platforms meet a double need: that of the company which wants to find or diversify its financing and that of the saver who is prepared to invest directly in the projects that have convinced him to make his money profitable.
Crowdfunding is also encouraged fiscally. If you grant a loan to a company that has been in existence for less than four years, your interest is exempt from withholding tax (30%). The amount of loans, of which the interest is exempt from tax, is limited to EUR 15.630. Anyone who lends money, in the form of a subscription to shares, to an SME that has been in existence for less than four years, enjoys a tax reduction of 30% on the invested amount, and even 45% for micro-enterprises, with an investment of maximum 100.000 euro and the obligation to hold these shares for at least four years.
The various recognised platforms have been active in Belgium for almost ten years and have experienced steady growth. The newspaper De Tijd (5/01/21) publishes the following figures over the last two years:
Even though the total amount of funds lent remains very modest in comparison to the credits provided by banks, it is a fact that crowdlending platforms fill a need in the market. They enable many companies to realise their projects and have a clear social role. All these institutions bring together a community of several thousand investors, be they individuals, family offices or institutions.
And yet today it appears that many investors do not feel entirely satisfied with the number of projects to be financed. Sometimes they cannot invest because the investment amount has been raised very quickly by investors and the investment opportunity closes very quickly again. In a way, this is the price of success. It is proof enough of the growing interest in this type of alternative to traditional bank financing.
At Ernest Partners, several companies are contacting us to understand the potential of crowdfunding. We believe that the platforms will become very popular in the coming years. And this is similar to what is happening in our neighbouring countries. They meet a real need of both companies and investors. Their solution allows for the diversification of financing for the company and investment for the investor, who often finds a more attractive return, even though the risk is not to be despised.