Crowdlending and crowdfunding platforms were born as a consequence of the government placing tighter restrictions on bank loans, after the financial crisis. This left a gap in the market that crowd lending companies have now seized upon. Acting as the middleman these companies become the link between investors and small to medium size businesses who are looking to borrow money.
With interest rates bottoming out around 0.3%, savers are looking for another option that can give them better returns on their investments. Crowdlending platforms, such as Iuvo Group, Funding Circle and Swishfund are receiving some positive reviews, but before you pump your life savings into one let’s take a closer look at some of the advantages and disadvantages for investors.
Advantages of Crowdlending
- Provides a higher rate of return
The first thing investors may look at are the interest rates. Some crowd lending platforms can boast yields ten times higher than the returns on more traditional investments. Be sure to check the level of risk involves with the investment and hear what others have experiences with any given company.
- Allows small investment sums
Investment account can often ask for you to deposit large sums of money for a fixed amount of time. Crowd lending platforms however, do not require you to deposit a fortune to get started. As little as £10 can be enough to begin investing.
- Create a diverse portfolio
Crowdlending gives you the ability to create a diverse portfolio by investing in multiple businesses, will allow you to reduce the risk of your overall investment. Some platforms even allow you to choose the specifically which companies you want to invest in, meaning you can do your own research.
- Tax benefits
Many platforms allow you to open an account in the form of an ISA or IFISA account. Meaning you can invest up to £20,000 and receive tax free earning.
Disadvantages of Crowdlending
- Potential losses
Unlike in a traditional bank account there is no actually guarantee that you will earn the interest promised in fact you could even lose all your money. Despite a platforms credit assessments and due diligence, there is still a risk a business will not be able to pay back their loan.
- Investments not covered by the FSCS
Not being covered by the financial services compensation scheme (FSCS) can cause people to be reluctant to invest their money. However, debentures or floating charges are used by crowd funding platforms to recover assets from borrowers, should they default on their loan repayments.
- Opportunities fail to materialize
When a company applies for a loan they can set a minimum amount for the loan to be completed. If this target is not met the loan will not materialize. This could leave your investment in no man’s land, not earning any interest for some time, and then returned without any financial gains.
- Difficulty withdrawing funds
It could potentially be a long and difficult process to withdraw your funds from your platform account. When you wish to withdraw your money by selling your stake in loans or company there may not be anyone that wants to buy it. Leaving you with a choice of reducing the value you sell at, cutting into your initial profits, or a lengthy wait to receive your returns.
Crowd lending platforms are a relatively new phenomenon, however there are numerous reputable ones to choose from, with largely positive reviews. Investment opportunities should be considered wisely and patiently. The platforms themselves have multiple selection options, to make your investment more or less risk adverse. There are accounts with automatic functions to invest or reinvest your money, or if you prefer you can choose the investment opportunities yourself.