Crowdlending –
simply explained

Key facts at a glance:

• In crowdlending, a large number of private investors jointly provide loans to companies or individuals via an online platform.

• This bank-independent form of financing can be worthwhile for start-ups, freelancers, and smaller companies due to fewer restrictions.

• Loan amounts in crowdlending are usually rather small, and financing can fail if not enough investors are found.

What Is Crowdlending?

Crowdlending is a relatively new form of financing and a variant of crowdfunding. It enables individuals and companies to raise debt capital independently of traditional banks.

In this form of financing, a loan amount is split into a large number of individual participations. These can be taken up by private investors on online marketplaces. The micro-loans collected in this way are then disbursed as a total sum to the company — this is also referred to as swarm financing.

The lenders, the "crowd", receive interest on their investment. Remuneration is usually in the form of a profit-participating loan, profit participation right, or silent partnership. For investors, this form of investment offers a relatively manageable risk due to the broad diversification across projects and the comparatively small individual investments: if one borrower defaults, the risk is typically spread across many shoulders.

Who Is Crowdlending Suitable For?

Crowdlending can provide support in any phase of a company's lifecycle: founders, freelancers, and smaller businesses in particular use this internet-based form of financing. For companies seeking access to capital independently of traditional credit institutions or investment firms, crowdlending can be a complementary financing option.

Furthermore, crowdlending is often used for marketing purposes. By promoting a project on such online platforms, specific target and investor groups can be addressed, increasing interest in the company, a new product, or a service. This can turn investors into customers. Conversely, it is also possible to encourage existing customers to participate in the crowdlending process.

What Are the Advantages and Disadvantages of Crowdlending?

The advantage for borrowers lies in the independence from banks. Through crowdlending, projects can be financed that might not pass the risk assessment of traditional lenders. In addition, there is often a high disbursement speed and direct communication with investors.

However, it can happen that the required investment sum is not reached or is paid out late. There is often no guarantee that the required number of investors will be found for every project.

The loan amounts available through crowdlending are often rather small compared to traditional loans. Moreover, the less strict risk assessments also carry the risk that borrowers may potentially over-leverage themselves.