Crowdfunding

Do you have a project you know how to carry out but don't have the funds to do so? You can always turn to a bank - but there's also an alternative to traditional lending: crowdfunding. Here, we explain what crowdfunding is, the main types, the advantages and risks for both those raising funds and those providing them.

What is crowdfunding?

Crowdfunding is a form of fundraising that allows individuals and businesses to raise money from a large number of people, typically via dedicated online platforms, to support a specific personal or business initiative. Anyone can contribute to funding the project.

Crowdfunding is a valid alternative to traditional finance, especially for start-ups and small businesses that may struggle to access credit through banks and other financial intermediaries.

The success of a crowdfunding campaign depends on the participation of a sufficient number of contributors - including small investors - who are willing to take a financial risk to support the idea. As you might expect, the quality of the project and how effectively it is promoted are crucial for a successful campaign.

Types of crowdfunding

There are several types of crowdfunding. The most common include:

• lending-based crowdfunding (also known as peer-to-peer lending), where investors lend money to project promoters under a loan agreement;
• equity crowdfunding, which allows promoters to raise capital by offering shares in their business. In this case, investors become part-owners and take on the risk of losing their entire investment if the project fails. When platforms are used to place debt securities issued by start-ups and small businesses, this is often referred to as investment-based crowdfunding.

Other types of crowdfunding are usually aimed at supporting social projects and involve smaller amounts. They include donation-based crowdfunding, where individuals donate money to support a cause or initiative, with no expectation of any return; and reward-based crowdfunding, where contributors receive a non-financial reward - such as a product sample or service - which may not be directly proportional to the amount donated. This model is often used for creative projects, such as films, music, or books. Sometimes, a fixed contribution entitles you to receive a discounted prototype or early access to a product.

The advantages of crowdfunding

Crowdfunding platforms bring together two main groups: project promoters, looking for funding to start or expand their activity, and investors, who wish to put their money into ventures that may offer high returns - but also carry higher risks.

Just like in a marketplace, the supply and demand for funding meet on these online platforms.

For promoters, crowdfunding offers a chance to access capital, particularly when they struggle to obtain credit through traditional means - for example, due to the highly innovative nature of the project. Equity crowdfunding is especially used by start-ups and innovative small and medium enterprises.

Some platforms specialise in funding specific sectors. One example is real estate crowdfunding, which refers to both equity and lending-based crowdfunding campaigns related to property projects.

Costs

From the investor's point of view, most crowdfunding platforms do not charge fees for registration or for participating in campaigns. For lending-based crowdfunding, platforms usually display information about the expected return (net or gross of tax), the duration of the loan, and the credit risk estimated by the platform itself.

Those who raise funds via crowdfunding must typically cover direct costs such as interest (in the case of lending-based platforms), as well as platform fees and other charges related to cash flow management and project setup. These costs are often higher than those found in traditional financing.

Whether you are an investor or a fundraiser, it's important to read carefully all the information documents made available on the platform and the contract.

Risks

If you are considering crowdfunding to invest your savings, you should be aware that while the potential returns can be attractive, the risks are significantly higher than with traditional investments (such as bonds, shares, or investment funds).

Many of the projects on crowdfunding platforms are run by young, innovative businesses whose financial soundness can be difficult to assess due to a lack of operating history. For this reason, it's important not to be guided by emotion alone or underestimate the risks.

Equity crowdfunding is particularly risky: investors become partners in the business and risk losing all the money they put in. Even if the business succeeds, dividends are not guaranteed, and selling your shares may prove difficult due to the lack of a secondary market. This is why small investors are advised not to invest more than they are willing to lose.

In lending-based crowdfunding, the risk lies in whether the borrower will repay the loan. The risk assessment is carried out by the platform, using models that may not be reliable or reviewed by supervisory authorities. In some cases, some platforms automatically match projects to investors based on user preferences (such as risk tolerance, project type, or loan term) and the features of projects.

Another key consideration, given the increasing availability of online financial services, is the identification of who is behind the platform and the project. To reduce the risk of scams or illegal initiatives, only use well-known platforms and make sure you can verify the identity of the project promoters and their contact details.