Investment crowdfunding is a means of gathering money for a company in which you look for a big group of small lenders. Each of the lenders is supposed to invest a small amount of money and receive equity shares in return. This investments option used to be available to accredited investors only, yet now the door has been opened to the wider circle of investors.
Apart from equity shares, investors can also receive debt – here a group of individual investors invest in a small part of a big loan. This kind of debt investment includes a higher risk level, hence, the interest rates are also higher than it is in the other options. Nevertheless, the risk can be diversified by sharing the whole amount of investment money between a numerous loans rather than investing in only one. Lenders have the knowledge of the intended use for the loan and its terms such as interests rate, loan’s length and probable credit rating. Generally, borrowers choose this option when the traditional ways of financing are too expensive or unavailable for them.
Crowdfunding vs. traditional sources
Crowdfunding has become an alternative for traditional ways of start-up financing. Bank loans, borrowing money from family or friends, angel investors etc. are the options which are not always available and profitable. In the case of investment crowdfunding, start-up entrepreneurs can find a good source of financing for the price of their shares adequate to the amount of money invested. By the means of crowdfunding, beginning entrepreneurs have the chance to find financing comprised of small investments made by a large group of backers.
LendingClub and Prosper are micro-lending platforms which enable lenders to become backers not part-owners of the company. Such backers profit from a loan by receiving interest payments throughout the whole life of the loan.
Can we avoid failures and losses?
Obviously, which is typical of investing process, the risk is present in both equity and debt investment options of crowdfunding. On the other hand, the risk can be lowered by cutting the capital into small pieces and investing in a large amount of options. The perfect way to decrease the risk would be an insurance, yet for now, this issue has been only discussed as the option available for a premium payment.
Any trouble with investing?
If you feel that you lose all the lucrative chances, take care of being well-informed. Look through the Internet for more information and observe the market so as to stay always up to date. Receiving significant news and current market analysis on your e-mail should also help you gain a good insight into the topic. And what if your motivation is continuously wearing out because of losing trades you keep making? Consider signing up for free stock simulator which will help you practice investing with virtual cash before risking your own money in real life.