Crowdfunding in Europe: a new way to invest efficiently
Crowdfunding is rapidly gaining popularity in Europe and many investors already familiar with benefits of investing in crowdfunding. Find out what is crowdfunding.
Crowdfunding is a method of financing business projects that is rapidly gaining popularity in our Europe. New crowdfunding investment platforms are emerging in our region, expanding their activities and have already become a serious alternative to traditional bank financing. Such crowdfunding typically includes real estate, business and consumer loan financing for ordinary people. Crowdfunding in Europe has probably become so popular for a number of reasons: first of all, the relatively attractive returns that can be obtained from investing, and secondly, the accessibility of this type of investing, as almost anyone can start investing on the crowdfunding platforms.
Crowdfunding is a type of fundraising in which a group of different people contribute all the funds needed. In principle, it can be used to finance a wide range of ideas, but more recently, crowdfunding financing is most often used to fund business projects. This funding mechanism allows a large number of individuals to finance quite large real estate or other business projects in small amounts and earn interest on the money.
Operating model of crowdfunding investment
Crowdfunding is based on modern online technologies that allow people from all over the world to participate in the investment process. Business projects are financed on dedicated crowdfunding portals, which can be said to act as an intermediary between those seeking funding and those able to provide it. Top crowdfunding platforms also select the most credible projects to be developed and present them for funding to investors registered on the platform. Each investor then receives a certain return on their investment for the funding provided to the project.
In summary, the modern crowdfunding operating model consists of the three principle actors:
- Developer - seeking to obtain financing for a real estate or business project they are developing.
- Investors - who finance the project to be developed and subsequently receive a return on their investment.
- Funding platforms - ensure transparency in the project financing process and disbursement of funds to investors.
Main types of crowdfunding in Europe
When it comes to crowdfunding, it is very important to get to know the main financing methods used in Europe and other foreign platforms. After all, the type of financing used on the platform essentially determines how you will receive your return on investment. Thus, although there are many different crowdfunding mechanisms in use around the world, the most popular in Europe are lending and equity-based crowdfunding methods.
Lending crowdfunding is undoubtedly the most popular business and loan financing model in Europe. In fact, many top crowdlending platforms operating in our continent use a lending-based business model. Lending-based crowdfunding is carried out on the so-called P2P money lending principle, where a loan of small amounts of money is raised by a large number of different investors.
Crowdfunding is usually used to finance the development of real estate or other business projects. Peer-to-peer lending is also used in this way, where consumer loans to individuals, rather than projects under development, are financed. In fact, among small investors, investing in loans is one of the most common ways of investing existing savings.
Equity-based crowdfunding allows investors to take ownership of the business or property project being developed and receive a share of the profits. In a sense, equity crowdfunding is similar to investing on the stock market, where shares in companies are acquired and ownership of a corresponding stake in the company is also granted. The big advantage of this type of financing is that the return on investment is rather solid. It goes without saying that the more profit a project generates, the higher the return for the investor.
On the other hand, if the project under development fails, the investor may lose all the money invested in the project. In simple terms, by investing in property, the investor becomes one of the owners of the business, so in the event of bankruptcy, he will be treated as a shareholder and will be the last in line of creditors. Therefore, when using equity crowdfunding platforms, the potential of the higher investment risk should always be considered.
Prospects for crowdfunding
The first thing to say is that in today's credit market, banks and other traditional financial institutions are becoming more selective about the businesses whose projects they will finance. While large businesses can still expect to borrow on fairly favourable terms, small and new players in the market are generally not considered. It is therefore only natural that as traditional credit institutions tighten their financing conditions, crowdfunding is becoming one of the alternative sources of business finance in Europe.
Small investors and ordinary people must also be kept in mind. Various peer-to-peer lending platforms enable people to invest in real estate and consumer loans. It is no secret that real estate is one of the most popular investment avenues in the world, and most of the platforms that have opened up can start investing in real estate with as little as EUR 100. In other words, best crowdfunding platforms are accessible to many ordinary people, and the popularity of this type of investment will grow even more in the future.