Back in 2017, a collaboration between the Institute of Financial Services Zug (IFZ) of Lucerne University of Applied Sciences and Arts, PricewaterhouseCoopers and the Swiss Marketplace Lending Association carried out a study of developments in this alternative credit and financing model. Although crowdlending – also known as peer-to-peer lending – is enjoying growing popularity, many people have simply heard the term without understanding what it means. The business model is actually very simple: borrowers and lenders are brought together via an online platform.
Borrowers looking for a loan are typically private individuals but can also be companies. In order to submit an application, they must disclose certain pieces of information, but they cannot be rejected as “uncreditworthy”. The lenders providing the loan include not only foundations and organisations but also private investors, who can invest an amount of their choice. The interest rates are determined individually for each loan and generally depend on the term, the amount borrowed, and the borrower’s default risk. The loan is not issued until the entire sum is financed. In many cases, a loan is provided by several lenders – hence the name crowdlending.
The mediating platform ensures that instalments are paid and that the terms are adhered to. In return, a fee is payable to the platform by the borrowers or lenders, depending on the model in question. For private investors, crowdlending offers a new, relatively risk-free line of business. The difference from crowdfunding is that, with crowdlending, the amount is paid back to the investors with interest. With crowdfunding, on the other hand, investors typically receive (small) “goodies” or the product in whose manufacturing they have invested.
How much money is lent through crowdlending per year?
In 2016, the credit volume in Germany came to some €200 million. Most of this was attributed to consumer crowdlending – in other words, lending to private individuals. The money is typically invested in debt restructuring, student loans, or loans for cars, travel or weddings. Around 11% of crowdlending loans were awarded in the area of business crowdlending – in other words, lending to smaller enterprises. These paved the way for project financing and short-term loans for liquidity management. The market appears to remain largely untapped, but the growth rates indicate that the proportion of crowdlending is set to rise.
In particular, crowdlending is a good option for artists, who often struggle to obtain a loan as a freelancer. Here, it often comes down to the idea and whether investors want to support it. Whereas crowdlending is still a new area, crowdfunding is already a widely used option. One example is the “Wehringhauser Schnurlos Festival ”, an alternative music festival in Hagen at which the music systems are run on batteries rather than mains power. This was supported by the Creative.Quarters Ruhr state programme in 2016 and 2017 and went on to successfully fund itself through crowdfunding in 2018.
The platforms are viewed favourably in terms of their future prospects. However, some owners fear reputational losses in the event of frequent defaults by borrowers. That would be disastrous, as crowdlending is still establishing itself as an alternative model and acquiring lenders and borrowers alike.