Crowdfunding gives an investor direct access to a specific borrower or project at a low entry ticket instead of an averaged bank rate. That access comes with a trade-off: no daily repricing, no exchange liquidity, and no fund manager selecting deals on the investor's behalf. Every advantage below has a matching cost, and capital is at risk throughout.
Crowdfunding Advantages and Disadvantages: A Lender's View
Crowdfunding Advantages and Disadvantages: Whose Side Are You Reading From?
When crowdfunding is discussed in terms of its advantages and disadvantages, many consider raising business capital a key topic. However, the business is the borrower, while the considerations for the lender are different. The investor who gives money has to assess the claim, including the perceived risk, the contractual obligations, and the investor’s position after the loan has been distributed to the borrower.
If the lender purchases a claim connected to the borrower in debt-based crowdfunding, they typically expect the repayment of this debt according to the previously agreed terms of the loan. Debt-based crowdfunding does not make the investor the owner of a business, unlike in equity-based crowdfunding. That is why the potential returns come in the form of fixed interest payments rather than the appreciation of the company’s shares.
In debt-based crowdfunding, the investor mainly bears the borrower credit risk if they cannot repay the principal or cannot continue interest payments. In equity-based crowdfunding, the investor risks because of their participation in the business and the dependence on its financial performance.
Who bears the risk in crowdfunding?
Ultimately, the lender of the funds ultimately bears the risk in crowdfunding. Despite platforms like Maclear being able to mitigate some of the risks by providing early limited liquidity through the Secondary Market and the collateral to secure the loans, it is impossible to eliminate them completely. Borrower performance still ultimately determines their capacity to repay the debt, so capital always remains at risk.
The Advantages of Crowdfunding for the Investor
One of the main advantages of crowdfunding is little capital for entry. Accessibility of the purchase of the claim on Maclear is quite high, given that the investor would only have to allocate €50 to purchase an individual claim. The second advantage is visibility because the lender can review the information about the borrower before entering into a loan agreement. The platforms provide internal risk scores, the assessment of the collateral, and other documents. Maclear provides an internal risk score from 1 to 10 for every project. Besides, additional information about the borrower is also available for the investor. Another aspect that is a clear advantage of crowdfunding is that it may benefit the investors who seek short holding periods for a faster return. Maclear claims typically range from 4 to 16 months until maturity.
One of the crucial aspects of the loan assessment is the consideration of the collateral. Collateral is the asset that is used to back the loan. Maclear uses the LTV metric to calculate the relative value of the collateral against the loan. LTV is calculated using the following formula:
LTV = Loan Amount / Collateral Value * 100
If the value of LTV is lower than 100%, it means that the collateral fully secures the loan against it and the investor generally has more flexibility and a larger buffer in case of the borrower’s default. If the LTV value is higher than 100%, the figure means that some parts of the loan remain unsecured.
The Disadvantages of Crowdfunding for the Investor
One of the main disadvantages of crowdfunding for the investor is borrower credit risk. If the borrower defaults due to financial difficulties or temporarily stops paying the interest, collateral and due diligence, although helpful in trying to compensate the investor for losses, may not achieve a 100% return of the capital. Technically, capital always remains at risk. Another disadvantage is strictly limited liquidity. A crowdfunding claim cannot typically be listed on the market and sold until maturity. The only option to exit earlier is by selling the claim to another investor through the Secondary Market. However, the sale is not guaranteed.
Another disadvantage includes reinvestment. The claims with a shorter term upon maturity may cause additional friction when the investor tries to understand what to do with the returned principal. Comparing the projects with different risk scores, maturity terms, and interest rates may be difficult and tedious. Likewise, the responsibility of the investor when they engage with crowdfunding is high. The investor should account for diversification, the quality of the borrower, perceived interest, and contractual obligations. Many parameters may produce genuine confusion.
What can go wrong for a crowdfunding investor?
In case the borrower becomes insolvent or temporarily fails to meet their financial obligation, Maclear first starts compensating the investor with continuing interest payments from the Provision Fund. On day 30, Maclear begins soft debt collection. If the obligations are still unsettled by day 60, the enforcement of the collateral may start.
Two Sides of the Same Mechanic
Crowdfunding advantages and disadvantages overlap since they share the different sides of the fundamental features of this asset type. The table below summarizes the features of crowdfunding.
| Feature | What it gives to the lender | What it costs the lender |
|---|---|---|
| Low entry ticket starting from €50 per claim | Easier diversification across multiple claims with relatively limited capital | Small tickets do not remove credit risk and may encourage excessive fragmentation |
| Visibility of the individual borrower | Ability to assess a specific business and its characteristics | Requires the lender to understand and evaluate borrower information |
| Collateral and LTV | An identifiable recovery source and LTV | Valuation can change, and enforcement may be slow or incomplete |
| Short-term timeframe (between 4 and 16 months) | The principal is scheduled for repayment relatively quickly | Creates recurring reinvestment decisions and does not guarantee early liquidity |
| No fund manager in between | More direct control over individual allocations | More responsibility for selection and diversification |
| Platform as counterparty | Infrastructure for underwriting, payments and administration | Adds platform dependency and operational dependency |
General information, not investment advice. Each row is one property seen from two sides, not two separate lists — capital is at risk in every case.
What the Platform Does Not Cover
Crowdfunding carries risks for the investor’s capital. The scenarios where partial or complete loss of capital is possible are realistic. The principal on the claim is not protected by deposit insurance. Maclear’s Provision Fund is a pool of reserves that is composed of the 2% fees taken from funded projects on the platform. That is why the Provision Fund's temporary interest payments are not the same as a buyback obligation and, therefore, do not protect the investor from the loss of capital.
Liquidity still remains limited and is only possible if the investor tries to sell the claim on the Secondary Market. The investor may list the claim, and, provided there is another investor interested in buying it, they can exit early. However, upon successful sale, a seller fee of 2.5% is charged by the platform, and the buyer enters a 30-day lock-up period. However, the sale is not guaranteed. Under Maclear’s GTC, if the claim remains unsold for 14 days, it is automatically removed from the Secondary Market.
Is Crowdfunding Worth It? How to Weigh It for Yourself
The question whether crowdfunding is worth it depends entirely on the particular investor. If the investor wants short-term returns and, potentially, higher interest rates, crowdfunding may be the right choice. Yet, if the investor wants to have more liquidity and have immediate access to the capital, then it is better to seek other options.
Likewise, the strategies for portfolio diversification may drastically differ from one investor to another. If the money is spread across the borrowers, sectors, and countries, it can reduce concentration risk. However, liquidity risk and platform risk, and, likewise, borrower credit risk, remain. That is why the investor should assess their particular risk tolerance to decide on the method of investment they would prefer.
FAQ
What are the main disadvantages of crowdfunding for an investor?
The potential disadvantages of crowdfunding for the investor include the potential loss of the principal, no daily repricing, limited liquidity available only through the Secondary Market, and no insurance on the capital that has been invested.
What can go wrong for a crowdfunding investor?
In case of a borrower’s default, the collateral liquidation may not give the investor enough value. If the LTV is higher than 100%, such a scenario is more likely with a conservative LTV. Yet, even with the latter case, the exact returns depend on the result of the legal proceedings.
Who bears the risk in crowdfunding?
The investor bears the risk in crowdfunding, not the platform or a pooled fund. Although the Provision Fund may offer a temporary backup by continuing to pay the investor the interest, it is not equal to a buyback obligation or a deposit insurance. Capital always remains at risk.
What does crowdfunding give an investor that a bank product does not?
Crowdfunding gives the investor direct visibility of the borrower, the overview of the collateral, and the assessment of the borrower’s internal risk score (ranked from 1 to 10 on Maclear). However, a bank deposit can offer insurance, while a crowdfunding investment platform cannot do that for the investor’s claim.
Is crowdfunding worth it?
Whether crowdfunding is worth it for a particular investor depends entirely on their time horizon, their comfort with illiquidity, and the share of crowdfunding claims in a diversified portfolio. Since different investors may prefer different risk categories and strategies, there is no universal rule that will explain why crowdfunding is worth it for any particular investor.
About Maclear
Maclear AG is a Swiss peer-to-peer (P2P) lending and crowdlending platform, headquartered in Switzerland. The company acts as a financial intermediary in the non-banking sector and is a member of PolyReg SRO, in accordance with Swiss financial regulations, particularly regarding AML, KYC, and GDPR. Maclear provides individual and qualified investors access to carefully selected business loan opportunities, with integrated risk assessment, a Provision Fund, and a Secondary Market for liquidity.
The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. Peer-to-peer (P2P) lending and crowdlending investments carry a risk of partial or total loss of capital. Past performance does not predict future results. Liquidity on a secondary market is not guaranteed. Readers are encouraged to conduct their own research and consult qualified advisors before making any financial decisions. The availability of products and services may be restricted in certain jurisdictions.