Crowdlending

Crowdlending (also known as 'Peer-to-Peer (P2P) Lending') is a modern way of lending and borrowing money that cuts out the traditional middleman, the bank. It uses online platforms to directly connect people or institutions with money to lend (investors) with individuals or businesses who need to borrow. Imagine a digital marketplace for loans. Borrowers get access to capital, sometimes faster and more flexibly than from a bank, while investors get the opportunity to earn interest on their cash, which can be significantly higher than what a savings account offers. The platform acts as the facilitator, handling the application process, assessing the borrower's creditworthiness, processing payments, and charging a fee for its services. For investors, the appeal lies in becoming the bank, earning returns directly from the interest paid by borrowers.

The process is deceptively simple from the user's perspective, but it's powered by sophisticated technology and financial vetting.

1. 1. The Application: A borrower (an individual or a business) applies for a loan on a crowdlending platform, specifying the amount they need and the purpose of the loan.
2. 2. The Vetting: The platform's team then does the heavy lifting. They perform credit checks, analyze financial statements, and assess the overall risk of the loan. Based on this analysis, they assign the borrower a risk grade (e.g., A, B, C, D) and set an interest rate. A higher risk grade means a higher interest rate to compensate lenders for taking a bigger chance.
3. 3. The Marketplace: The loan request is then listed on the platform's marketplace for investors to see.
4. 4. Funding the Loan: This is where the “crowd” comes in. Instead of one person funding the entire loan, dozens or even hundreds of investors can each contribute a small portion. An investor might put just €25 or $25 into a €10,000 loan. This is a core principle: diversification.
5. 5. Repayment: Once the loan is fully funded, the money is transferred to the borrower. The borrower then makes regular monthly payments (part principal, part interest) back to the platform, which then distributes the payments to the individual investors according to their share of the loan, after taking a small service fee.

Not all crowdlending is the same. The main categories you'll encounter are:

• Consumer Lending: Loaning money to individuals for things like consolidating credit card debt, buying a car, or funding a wedding. These loans are typically unsecured, meaning there is no collateral to seize if the borrower defaults.
• Business Lending: Funding for Small and Medium-sized Enterprises (SMEs). This could be for anything from buying new equipment to managing cash flow. These can be more complex to assess but are the backbone of many economies.
• Real Estate Lending: Loaning money for property projects. This could be a short-term 'bridge loan' for a developer or a longer-term 'buy-to-let' mortgage. These loans are often secured by the property itself, which can lower the risk for investors.

For a value investor, any investment must be judged on its fundamental merits and, most importantly, its risks. Crowdlending offers an interesting proposition but requires a healthy dose of skepticism.

The main appeal is the potential for attractive returns in a low-interest-rate world. When government bonds and savings accounts offer paltry yields, earning 5%, 8%, or even more through P2P lending seems incredibly tempting. It also offers a chance to add a different asset class to your portfolio, one that isn't always tied to the daily swings of the stock market. You are, in essence, buying a stream of future cash flows, which is a concept familiar to any value investor.

“Risk comes from not knowing what you're doing.” - Warren Buffett This quote is the perfect lens through which to view crowdlending. The advertised returns are not guaranteed. Your actual return is what's left after fees and, crucially, defaults.

• Default Risk: This is the big one. If a borrower stops paying, you can lose some or all of your investment in that loan. Platforms' risk ratings are just estimates, not crystal balls. Are you truly inside your circle of competence when assessing the creditworthiness of a small business in a different city or an individual you've never met? Probably not. You are relying almost entirely on the platform's due diligence.
• Platform Risk: The crowdlending platform is a business, and it can fail. If your chosen platform goes bankrupt, recovering your money could become a complex and painful legal process. Before investing, investigate the platform itself: Is it profitable? How long has it been operating? Is it regulated by a financial authority?
• Liquidity Risk: Your money is tied up for the life of the loan, which could be several years. Unlike a stock, you can't sell your loan portion instantly on a public exchange. Some platforms offer “secondary markets” to sell loans to other investors, but these can be illiquid. If you need your money back in a hurry, you might have to sell at a significant discount, if you can sell at all.
• Economic Risk: Crowdlending has largely grown up in a period of economic stability and growth. During a major recession, unemployment and business failures would rise, leading to a spike in loan defaults. The attractive returns seen in good times could quickly evaporate, or even turn into significant losses, across the entire P2P sector.

Crowdlending can be a potentially rewarding part of a diversified portfolio, but it should be treated with caution and viewed as a higher-risk investment.

1. 1. Diversify, Then Diversify Some More: This is the single most important rule. Don't put a large sum into one loan. Spread your money across hundreds of different loans, across different risk grades, loan types, and even different platforms. This mitigates the impact of any single default.
2. 2. Read the Fine Print: Understand the platform's fees (for you and the borrower), what happens when a loan is late, and what the platform's process is for chasing down defaulted loans. The platform's historical default rate is one of the most important statistics to look for.
3. 3. Start Small: Allocate only a small percentage of your overall investment portfolio to crowdlending. Don't bet your retirement on it. Think of it as speculative capital and see how it performs before committing more.