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The following article was published in our article directory on April 19, 2021.
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Crowdfunding, Crowdinvesting, Crowdlending: briefly about how they function

Article Category: Finances

Author Name: Igor Alekseev CEO ePlaza.biz

It is not only possible to raise money for your business by taking loans, but also by crowdinvesting, crowdlending and crowdfunding. Understanding these definitions can cause some difficulties, they are also mixed up and used in a wrong context very often. There is nothing to be worried about, however, we attempted to understand and explain their essence as well as prepare a simple checklist to determine a platform for making money.

· Pooled funding as a core principle
· Crowdfunding — a pooled funding of commercial and non-commercial projects
· Crowdinvesting — a synonym for pooled funding, pertaining to commercial purpose
· Crowdlending — borrowed investment
· Possible risks for entrepreneurs
· Summary

Pooled funding as a core principle

Crowdinvesting, crowdlending and crowdfunding are the definitions related to co-investment or funding for a project you liked through specific online-platforms. They have a shared principle: several individuals or companies merge and join their financial resources to invest in the implementation of a project.

Transaction participants

Finder — the one, who seeks the money. It can be a simple borrower, a company, that attracts money, or a singer, who is raising money to record a new album.
Backer (the investor). Anyone can invest in both projects and companies, whether it's someone's friend, a comic book fan, commercial companies, professional investors, banks, PDA or even MFI.
The platform - a service, that mediates between the parties. It is a site or an app that brings together the investors and those who are in need of money.

Ways for investors to finance projects

Pro bono - for example, because of their interest in a scientific experiment or a wish to help people, affected by natural disasters.
For profit - music group fans invest money in a recording of an album to receive a CD with new songs and their idols' signatures.
As a loan - when an individual or a company want to increase their savings whilst helping a business.
For a stake in a project or a company - a group of people invest in the capital stock of a startup.

Where money is being raised
Money is being collected through the crowdfunding platforms or any other online marketplaces. The attribute of such a division is based on the fact that first are regulated by special laws, while others are not.

Crowdfunding platform - a well-established juridical term. These are services to attract money to the business that bring together the borrowers and the investors.
They're subject to special requirements. For instance, only legal personal can submit requests for funding, while investment management aims to develop the business.

Online fundraisers for any occasion - sites, where there is a possibility to:
1. Post a presentation of your project
2. Find supporters of the project, willing to invest.
3. Receive the money from others

Creative and social projects are usually being financed on such platforms: publications of both paper and comic books, productions of music albums, board game development, support to animal shelters.
Less frequently — commercial companies, that can increase investors' income.
For instance, there is a service that enables the financing of litigation.
A group of people raise money for a good lawyer, who protects the rights of the plaintiff or the defendant, and in the case of a win, the payments are distributed among the project investors.
Crowdfunding — pooled funding of commercial and non-commercial projects.

Crowdfunding implies a direct funding for the companies or projects. There is commercial and non-commercial funding.
Examples:

1. A group of people invest in equity shares of a startup and become its co-owner, then profiting from its return.
2. A few people and companies invest in the real-estate organization. They become co-owners of the purchased property and will profit from its rental.
3. Gated community residents invest in road maintenance and bridge construction, collect money and get quick and comfortable rides in exchange.
4. A social entrepreneur placed a bid on the platform in order to open a farming business and help a dying village. He raises money, pulls the trigger and creates employment, whilst investors receive the presents from him: souvenirs, homemade honey or jam.

The attribute: money is invested in the companies and projects, and the investments themselves can be both commercial and non-commercial.
Those, who could effectively use it: people and companies, who launch the fundraisers for commercial, creative and non-commercial projects.
Where to find the money: online fundraising platforms.

How crowdfunding can function:
1. A creator of the project signs in at the crowdfunding platform.
2. One fills in all the required information for his profile, including scanned copies of the documents. One also provides details on the project in order to get the investors interested.
3. Mentions a reward for a contribution to their funds.
4. Launches a fundraiser.
5. Receives money and pays taxes. Before transferring money to his own account, one is supposed to pay an income tax as an initiator of the fundraiser.

What crowdfunding platform can possibly demand in the case of failure

1. It's mandatory to raise 100% (full amount). If the collected money doesn't reach the needed amount, the creator of the project will get nothing, and the funds will be returned to the investors.
2. You have to raise at least 50%. If half of the full amount is collected, an individual or a company will be able to transfer funds. The more money is raised, the less commission is required.
3. Receive as much as you raise. You can transfer any sum of money you want to.
4. You have to raise a mentioned sum of money without time limits. There is no end date for the fundraiser in this case. It is usually used in social projects.

Crowd-investing — a synonym for pooled investment, pertaining to commercial purposes.

This is when lots of people or companies invest in something to generate a revenue. The peculiarity: people get to hold their share in a project or a business. It cannot be a charity project funding, because it pertains to commercial activity.
The attribute: commercial focus, people take a stake in a project or a company.
Those who could effectively use it: companies and projects that aim to make a profit for the investors.
Where to find the money: specific online platforms and services that attract investors under various terms.

How does it function:
1. An applicant signs in at the crowd-investing platform.
2. Describes the project or the company's activities and attaches the documents to examine.
3. Staff verify the applicant.
4. The applicant and the platform assemble a contract for rendering a service to attract the investors.
5. When the information regarding a company or a project is placed on the site, the investors can invest their money and buy out shares. To make it work, each entity is contacted to invest via an electronic signature.
6. The applicant is sent the money, and then the investors make a profit.

Crowdlending - borrowed investment

Let's imagine that an entrepreneur needs money to replenish the working capital in the company. He places a bid at the investment platform and then gets a loan from the several independent investors.
Further actions are similar to getting a regular loan: the entrepreneur returns the money; however, it is received by those who invested in the bid.
The attribute: investment, borrowed from either one or several investors.

Those who could effectively use it: entrepreneurs, in order to open and develop their business.
Where to find the money: investment platforms.

How does it work:
1. A borrower signs in at the investment platform.
2. Renders the documents for the check-out.
3. The platform verifies the borrower and makes a decision about his admission to the platform.
4. If everything goes well, the bid is sent for the investment.
5. The parties to the transaction sign a loan agreement online with the use of electronic signature.
6. The money is sent to a nominee account first, and is then transferred to the borrower's settlement account. The platform can charge a commission for the usage. The commission is often levied on total amount or percentage from the monthly payments.
7. The borrower replenishes the nominee account at a particular arranged time, and then the money is transferred to the investor's account and the amount of debt decreases.

What are the cons for entrepreneurs?

Delays. Some platforms are promising that companies and borrowers can get their money within an hour or a day. It is possible, but there is a small number of platforms that can reach such timings. It often takes longer to raise funds, because no one wants to invest.
If money is in urgent need, then you should look for the platforms that are willing to invest their own funds and then hand the project to the secondary market.
It usually works this way: a platform has its key investors. These are companies that are controlled by the platform team and aim to fund an application really quickly to transfer it to the secondary market. After that, it becomes available for the independent investors, that can buy out a share in a project that has already been invested.

The commission and other payments at the platform

The platforms can set the commission for both borrowers and investors on the regular basis. An average amount of the commission varies from 2 to 10 %, depending on the specifics of funding projects.
You should pay attention to the additional payments while choosing a platform. Some platforms can charge for the money transfer to their account or for the legal support of the contract.

Summary

1. Pooled funding is a collective investment in a project you liked most, where ordinary people, legal persons and loan companies can all be investors.
2. Money is collected through investment platforms or regular sites, where it's possible to place the information about a project, find people for investment and organise a fundraiser.
3. There are their types of the pooled funding: crowd-investing, crowdlending and crowdfunding.

Keywords: crowdfunding, crowdlending, crowdinvesting

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