crowdfunding

Crowdfunding

Crowdfunding bridges the gap between borrowers and lenders, by offering a different service than traditional banking to fundraisers/borrowers;(small businesses, startups, construction development projects; car-loans, agricultural-loans, personal-loans to name a few).

Most crowdfunding platforms receive applications (not very different from a bank loan application) from potential borrowers and then run their due diligence (not in the same depth as a traditional bank would, citing operational costs), as to the sustainability of the aimed amount and its interest-rate payments by the borrower.

Most crowdfunding platforms have a base rate as a starting point in determining the interest rate for each loan to be issued. On that base rate an adjustment risk premium and a volatility premium is added. Both adjustment and volatility rate are determined by the loan grade the loan to be issued receives by the due diligence process. This results in a preliminary interest rate for the loan to be issued.

Every loan grade has specific amount limits, i.e. loan grade A has an amount limit of USD 5,000.00, if the potential borrower requires a loan of USD 6,500.00 his loan grade scales down to the next loan grade that allows amounts up to USD 7,500.00, and therefore the borrowers’ rating drops to B which is assigned to a higher interest rate.

The requested term of repayment and the borrowers’ credit history are risk modifiers that could downscale the loan grade even further, increasing the loan interest rate even more. The crowdfunding platform then lists the borrower’s loan request to the “crowd”, namely the investors, who can contribute by a minimum amount (some platforms offer as little as USD 1.00) up to the whole issuance, in order to raise the requested amount. This process naturally takes time, from weeks up to months, and in some platforms if the total amount is not raised by a scheduled date, the lenders receive their money back but the borrower is back to square one; still needing the funds.