The crowdfunding market in Europe is growing rapidly. Investors can help finance different types of crowdfunding, from peer-to-peer lending to business loans and equity. To raise money with crowdfunding is an appealing alternative to the traditional banking system and potentially offers good returns to investors.
What is crowdfunding?
With crowdfunding, projects or business ventures can raise capital with small amounts of funding from a large number of people. Crowdfunding is an increasingly popular alternative to lending money from banks, since these are more hesitant to fund small-to-medium businesses or demand high administration costs.
Crowdfunding is made possible on dedicated online platforms that bring investors and entrepreneurs together. It creates an opportunity to raise hundreds, thousands or even millions of euros from all types of investors.
As an investor, funding projects is appealing because you can choose from a lot of different projects and start investing with, for example, one hundred to a thousand dollars. Your reward for funding a project is typically a monthly payback plus added interest.
European crowdfunding market on the rise
Raising money with crowdfunding is increasingly popular. The European market is still in its early stages, but is growing rapidly. Between 2015 and 2018 the alternative finance market in Europe tripled. Some countries are clear frontrunners in the crowdfunding market, such as the United Kingdom, Germany, France and the Netherlands. New European regulations in 2020 helped to further professionalize the market and is expected to result in further growth. In that year, the European crowdfunding market amounted to a total volume of 19 billion euros.
Types of crowdfunding
There are several types of crowdfunding. Perhaps the most well-known form is donation-based crowdfunding, which is often used by charities and other nonprofits. Reward based crowdfunding, where startup companies or independent artists offer a discount or free product or service in exchange for donations, is popular as well. Investment crowdfunding, however, accounts for the majority of the market. The target amount for investment crowdfunding is usually between 50 and 500 thousand euros.
Peer-to-peer consumer lending is the most popular form in Europe. This means you invest in consumer credit meant for someone else’s home renovation or education, for instance. P2P loans have potentially high interest rates, especially in countries where bank fees are high. Therefore, taking out a loan through the bank is not an option for many people. Read more about peer-to-peer lending.
Financing business loans is the second most popular option. This type of crowdfunding will usually consist of small-to-medium businesses looking for growth capital or funding for real estate, for example. The last option can be a fairly safe investment because of the collateral. Because banks are more hesitant to lend money to small businesses, the crowd is a popular alternative for funding.
Equity based crowdfunding is also a possibility and growing in popularity. This type pays back lenders with company shares proportional to their investment. It is especially interesting for startups that do not want to rely on capital investors. Keep in mind that this form of crowdfunding bears more risk as an investor, because you do not know if a company will make enough profit to pay its shareholders.
Advantages of a crowdfunding platform
Crowdfunding has a few benefits compared to traditional investments. First of all, crowdfunding platforms make the process of investing very easy.
On these websites you have access to all different types of projects and companies, as well as their documentation and creditworthiness. And so, you can choose which business speaks to you the most. There are also special crowdfunding websites only offering certain types of projects, such as real estate or environmentally conscious ventures.
In addition, you can see if other investors are already on board in order to make an informed decision. And when you are interested, you can immediately make the investment instead of entering a long administration process at the bank. Therefore, the administration costs of crowdfunding are often lower.
Just like any investment, funding campaigns and projects has its risks. First of all, potential risks are in part mitigated by crowdfunding platforms. For example, websites will usually critically assess business plans and company figures before an entrepreneur can apply for a loan. As a result, the crowdfunding project will also be assigned a certain risk label, so you know what you are getting into.
Unfortunately, there is always a possibility that a small business can’t pay back the loan or a crowdfunding campaign does not reach its funding goal. In the last case, the money you put in as an investor will be returned to you. If a company can’t repay the funds, some crowdfunding sites offer a buyback guarantee. The platform will then buy back the overdue credit in full including interest. Possible guarantees and liabilities differ per platform, however, so make sure you look into this before investing.
Of course you can further lower the risks yourself by spreading your investments accordingly. For example, spread low amounts across different projects with a low risk label. In addition, crowdfunding in Europe is regulated by the European Union. If crowdfunding platforms adhere to a set of rules, such as an investor disclosure regime, they can authorize their services more easily across Europe.
Investing in crowdfunding can offer good returns. For a regular small-to-medium business loan, investors can expect an interest rate between 5 and 10 percent. Investors that fund P2P loans can sometimes have an interest rate over 10 percent.
For annualized net returns, crowdfunding platforms score around 5 percent per year. This of course differs per project and platform. For equity crowdfunding, for example, research indicates an expected yearly return around 9 percent for investors.
Frequently asked questions
Some frequently asked questions about crowdfunding are:
How do I start my first crowdfunding campaign?
If you want to raise money for your business or personal project you can create your own campaign, but if you don’t know that much investors it is usually easier to find a platform that helps you with finding the funds you need. The type of platform depends heavily on the reward that you want to offer. Are you looking for donations, fans or investors that are want to make profit on their personal savings?
Which projects should I invest my money in?
If you want to finance projects be aware that the differences between crowdfunding campaigns can be huge. Some are looking for support and donations, while others offer serious financial rewards. Be aware that lending money to a business or individual comes with a risk. You can lose your money.