Crowdfunding is an umbrella term for raising money online from many people. It splits into four types: donation, reward, equity (also called "crowdinvesting"), and debt (also called "crowdlending"). Crowdinvesting gives you a stake in a company; crowdlending means you lend money and earn interest. They differ in what you receive, the risk, and how returns are paid.
Crowdfunding is an umbrella term for an activity that involves fundraising by the participants of a crowdfunding campaign. The users transfer funds to contribute to a certain project within the given timeframe, usually online via a dedicated platform. Crowdfunding is divided into 4 types: donation, reward, equity, and debt.
The crowdfunding process begins when a creator of the project develops a pitch outlining the project’s goals and the amount of funds required to complete it and then displays it on a platform with the supported material, if there’s any. The users may transfer a certain amount to help the project reach the financial milestone.
In comparison to the traditional financing methods, crowdfunding significantly democratizes access to capital and allows investors without a broad network of connections and backup to secure the necessary investment for a project. Besides, the scale of the contribution is determined by the willingness of a participant; typically, crowdfunding allows small contributions from many people, therefore diversifying the funding base.
This offers flexibility in fundraising and creates the sense of collective ownership that may help the promotion of the product that is being funded. However, crowdfunding may be financially constrained when it comes to finding large sums for the projects on a major scale. Some projects involving complex technical solutions’ development may need expert guidance and strategic backup that is better given by experts and investors. Therefore, crowdfunding may not be the optimal choice for certain types of projects.
What are the four types of crowdfunding? This is a question that is best answered with a chart. Below, there is a comparative chart that describes every type of crowdfunding campaign that exists.
A donation-based crowdfunding campaign is the first type. This campaign is based on a simple premise that the participant transfers money to fund a project or an idea without expecting anything in return. This type of campaign is commonly used by the non-profit organizations that run some charity or community projects. However, it can also appear in some crowdfunding campaigns of the small start-ups.
Another type described in the table above is rewards-based crowdfunding. This campaign involves offering some kind of reward for financial contribution to the project. The reward does not have to be anything specific and is entirely dependent on what a business or a project’s owner will decide to set up as a reward for funds. Some of the examples for rewards include a free product, a service, or a membership in the creator’s community. The volume of the reward differs but can be proportional to the amount that the user has contributed.
Another type is equity-based crowdfunding. This type involves a reward that includes a stake or a percentage of the company’s or project’s profits. Equity-based crowdfunding is a form of venture capital that involves supporting a future project with the hopes of it becoming commercially successful and bringing revenue.
The last type is debt-based crowdfunding. This is the type when the borrower does not give the equity in the company but instead pays back the invested money to the lender. Overall, the investor may receive the money back with interest in a fixed period. This type of crowdfunding may also bypass traditional financial institutions, as it is also available to do online via the specialized platforms.
The four types of crowdfunding are donation-based, reward-based, equity-based, and debt-based. Donation-based crowdfunding implies that the participants of the campaign who give money do not expect anything in return; the rewards-based type is about the participants receiving a free product, a membership, or other perks in return for their funds. Equity-based crowdfunding gives the lender the opportunity to have ownership of the business or the project by offering a stake in return for finances. Debt-based crowdfunding exchanges the funds for a fixed interest and principal repayment upon maturity.
Crowdinvesting, or equity crowdfunding, is the subtype of crowdfunding when an investor receives a share in the company or the project. The income that the investor gets is the dividends plus the increase in the company’s or the project’s value. Crowdinvesting supposes that some transfer of ownership over the company goes to the investor based on the proportion of the invested capital.
Usually, crowdinvesting happens like this — the investors browse the projects that are currently listed on different online portals and then choose the projects they would like to contribute to financially. Then, after the money goes to the project, the investor gets a direct stake in the company in return. This model carries the risk of the share’s loss in case the company claims insolvency or in some other cases. Besides, there is an issue with liquidity because, if the company’s price does not increase or the company fails to cover its debts, the investor may partially or fully lose the invested capital. Maclear does not work as a platform for crowdinvesting; it is not the product of the company.
Crowdlending is a debt-based subtype of crowdfunding when an investor lends the money to the borrower for a fixed period of time. The investor in this case, likewise in debt-based crowdfunding in general, does not receive a stake in the company and gets interest and repayment of the principal upon maturity of the claim instead. Crowdlending is usually set up under the fixed contractual terms between the investor and the borrower, and the investor carries the liquidity and borrower-related risks when lending the money.
Maclear offers the platform for crowdlending. The potential income the investor will get is measured by annualized return on investment, or AROI. The platforms like Maclear may try to mitigate the borrower-related risks by using certain mechanisms. In Maclear’s case, the lending is secured through the collateral, and the borrower-related risks are mitigated by Maclear’s Provision Fund. Provision Fund acts as a pool of funds that can be used in case of a temporary disruption of interest payments. However, Provision Fund can only try to mitigate the risk. Since the investor carries the borrower-related risks when lending the money, returns are not guaranteed. Provision Fund does not equal a buyback guarantee that may ensure that the investor recovers the principal. Crowdlending is not a risk-free investment and may result in a partial or complete loss of funds in case certain risks turn out to be true.
Maclear uses crowdlending as a type of crowdfunding service. As a platform, a financial intermediary under an SRO-regulated framework, Maclear provides the investors with the opportunity to lend money in return for fixed interest payments and the repayment of the principal upon a claim’s maturity. The risks are mitigated by the collateral backing up the loan and the Provision Fund supporting interest payments for some period in case of temporary delays. The returns are not guaranteed since crowdlending is not risk-free.
Crowdinvesting and crowdlending are both subtypes of crowdfunding, but they are different in terms of the return drivers. Crowdinvesting focuses on business commercial growth and product ownership with the aim to get more equity in the long run and gain capital, whereas crowdlending focuses on a consistent cash flow maintained through the regular payments of interest on the loan and principal repayment upon maturity. The table below summarizes the differences between crowdinvesting and crowdlending.
Crowdfunding is an umbrella term used to describe the process of raising money online from many people, whereas crowdinvesting is an equity-based crowdfunding subtype that assumes that the lender gets ownership of the product by acquiring stakes of the company in exchange for the funds they invest.
Both models can fit the investor depending on the kind of risk the investor is willing to accept and the goals of the investment. Crowdinvesting is a better option when it comes to capital accumulation and returns in the long run. Equity-based investments can give more income from this perspective. The income would depend on the commercial performance of the company that the investor chooses to lend to. If the company grows and if its market value increases overall, then crowdinvesting can achieve its goals of providing the investor with long-term capital accumulation.
However, since equity-based investments also require ownership of the company, as the investor immediately gets a share of the company’s stakes proportionate to their investment, a higher risk in terms of liquidity is also possible. If the company fails on its way to commercial success or claims insolvency, the investor may lose their share and partially or fully lose the investment. Therefore, crowdinvesting may potentially bring more value but with the trade-off of a higher risk in terms of liquidity.
Crowdlending, on the contrary, allows one to maintain consistent cash flow through the fixed interest payment and have a more predictable return profile through the initial agreement to repay the principal to the investor. Overall, crowdlending allows the investor to retain capital by receiving payments at a fixed rate and within the given period of time. However, the potential returns may be lower, but the investors may choose crowdlending if they want more stability and, potentially, less volatility.
Crowdlending may be a legitimate way to earn income by getting fixed interest payments and the repayment of the principal. However, the calculated annualized return on investment (AROI) is not guaranteed since crowdlending is not risk-free. Despite some platforms using a Provision Fund or collateral-backed loans to mitigate the risks of temporary interest payment disruption or liquidity issues, the investment is not completely secure, and the returns are not guaranteed. The investor would still personally carry the borrower default and liquidity risks.
Crowdfunding is an umbrella term for the process of people giving money to support the project online, while crowdlending is a debt-based subtype of crowdfunding. The lender usually gets a fixed interest payment and the repayment of the principal upon the claim’s maturity.
Crowdinvesting is a crowdfunding subtype that is based on equity. The lender receives the stakes of the company in return for their financial contribution. This subtype aims at product ownership and long-term capital gains through the increase of the company’s value.
Four types of crowdfunding are donation-based, reward-based, equity-based, and debt-based. Donation-based crowdfunding assumes that the lender gives money for the development of the project without expecting any material return. Reward-based crowdfunding can give a free product or a membership in return for the financial contribution. Equity-based crowdfunding allows the lender to have partial ownership of the product by giving stakes of the company in return for the investment, and debt-based crowdfunding gives fixed interest payments and the repayment of the principal as a reward.
Maclear uses crowdlending as a debt-based subtype of crowdfunding. The investor lends money to a project or a company in return for fixed interest payments and the repayment of the principal upon the claim’s maturity.
Whether crowdlending is a good investment depends entirely on the outcome of a crowdlending project. Crowdlending usually assumes that the investor would regularly receive fixed interest payments and would get their face value back when the claim reaches maturity. Therefore, it is generally considered to be a more stable and less volatile option than, for example, equity-based crowdfunding. However, crowdlending does not guarantee returns, as it is not equal to a risk-free investment since the investor has to carry the risk of borrower default and face potential issues with the liquidity of the asset.
