Crowdlending is a form of capital raising that permits high net worth individuals (as well as corporations, trusts and other institutions) to invest in businesses through debt.
Generally lenders find these opportunities to invest through general solicitation over the Internet or through a public forum.
Crowdlending is a great new development for a number of reasons.
First, Crowdlending is a new source of capital for businesses. Businesses need new sources of capital. Bank lending levels are still in absolute terms lower than they were in 2008. This is particularly important for start-ups (of all kinds, not just tech companies), because start-ups create the most jobs out of any segment of business maturity.
Second, Crowdlending may create a source of capital for communities that have been underserved by traditional lending institutions.
Third, Crowdlending can reduce the costs of borrowing. Interest rates can be lower and so can fees. Businesses can then use these savings to increase wages, improving sustainability and energy efficiency programs, provide better healthcare.
What About the Risks?
For lenders, Crowdlending is risky, just like all other investment activities. However, there is reason to believe that the activity can be less risky than other forms of investment activity. The reason? The community aspect that typically accompanies Crowdlending.
There have been numerous studies looking at the relationship between community lending and default rates compared non-community bank lending. A recent study by the Federal Reserve concluded that there risk of default appears lower in community-based lending institutions.
Crowdlending typically means investing in a business in your community.
Moreover, the same due diligence tools banks use to determine credit-worthiness are available to individuals either through the platforms or through secondary services like Experian and Dun and Bradstreet. In addition, servicing models used by financial institutions (things like UCC Filings, collection activities, distressed asset sales) are also all available now to individual consumer lenders.
So while there is risk with any investment, one might argue that compared to the stock markets, the ability to at least use a collections agency to get some of your money back is better than what happened with the last financial meltdown.
Crowdlending Is the New Crowdfunding
Crowdlending is in the literal sense, people in a community coming together to lend money to a business to get it started, or to help bridge it through tough times. People have been doing this for year.
What has changed is the Internet and the JOBS Act has just rendered this traditional way of raising community capital much more efficient.
How Big Will Crowdlending Become?
It’s hard to say how big Crowdlending will become. The industry is only months old, and additional regulations at the state and federal level may make it easier or harder for the industry to grow, depending on how things shake out. So let your representatives know you want Crowdlending!
About the author: Tabitha Creighton is CEO and Co-founder of InvestNextDoor, a new Crowdlending marketplace that enables Main Street businesses to issue promissory notes to community-based investors, and provides back-office services to support businesses and investors throughout the borrowing and repayment lifecycle. You can find her on Twitter @tabcreighton, on LinkedIn at www.linkedin.com/in/tabithacreighton, on email at firstname.lastname@example.org, or at her marketplace at www.investnextdoor.com.