If you are one of the people who keep thinking about the possibility of building a small business, growing the one you have now or want to restructure your debt to pay less interest and what has stopped you is the lack of capital then stay because this time we will talk about crowdfunding and how it works.

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Crowdfunding, what is it?

As the name says, it is a business model where many people decide to contribute their money to fund ideas, projects or invest their money in some way. This model has thrived because it addresses critical points that traditional banks are currently neglecting.

On the one hand we have to ask for financing for any purpose is tedious and unlikely to be approved, even if you have a good credit history. And on the other hand, the conditions that these institutions impose on their borrowers are very expensive or not very kind (interest rates, payment terms, etc.).

What is debt crowdfunding?

Debt crowdfunding is a method of crowdfunding. Through this model, a group of individuals invest resources through a platform to grant monetary loans to other people.

The model has some characteristics that differentiate it from other financing methods such as banking. And it is that being a collective financing, and not of a single entity, the conditions of the credits can be better, and thus obtain, for example, lower interest rates.

While the crowdfunding model can be seen as a method to obtain financing, it should not be lost sight of the fact that it is also an investment channel. This is because being a collective funding platform, anyone who has savings that they want to put to work, can bet their resources on debt crowdfunding, lend to other people, and thereby earn competitive returns from the rate paid by each credit acquirer.

It is important to say that debt crowdfunding works through technological platforms that are operated by a third party. It is responsible for providing the infrastructure for lenders and credit applicants to interact. In other words, it is the arbiter who oversees issues such as the granting of credit, which includes studying the profile of those who request financing, and that the promised returns are generated.

While the crowdfunding model starts from the premise that a group of people come together to finance others, the schemes can vary a bit. For example, there are some platforms that offer those who want to lend, to invest a fixed amount for a certain period, to finally grant a return. There are other options in which those interested in investing open an account, pay a certain amount, and they decide who to finance, with the possibility of withdrawing the resources.

In this logic, for those looking for credit, there are debt crowdfunding options in which the financing request is entered, in some days an answer is given on whether it is lent or not. In other options, those interested in financing enter their application, if approved, publish their desire to acquire credit, and each of the lenders will decide if they want to grant credit, and if so, how much. In this example, being collective financing, if a person asks for 10,000 pesos, more than one can contribute resources until the proposed amount is collected.

It is important to mention that debt crowdfunding can also be referred to as crowdlending.

Since when has crowdfunding existed?

Maybe it sounds like an innovative idea (which it is) and very recent, but in reality this business model has been on the market for a long time.

According to Fundable, an American funder, it all started in the 1700’s, but it was tangible to us in 1997 in Europe when a rock band originally from Britain funded their tour with online donations from their own fans. And that was the first step, after that and as time progressed more crowdfunding platforms were created for different purposes until it became something more serious in 2000.

Crowdfunding in Mexico arrived several years later, in 2012 the first platforms operating in our country were just being introduced. However, since then, they have increased in number and continue to grow.

Get to know the crowdfunding ecosystem

According to a publication by Finder, a company that is dedicated to financial advice we find 5 types of crowdfunding.

Donation-based crowdfunding

As its name says, cases are launched on the corresponding platforms such as GoFundMe in Spanish. Whether from individuals, groups and organizations with a cause, the goal is to achieve the goal amount to achieve their objectives.

How does it work?

1. You must open a profile on any platform that has this type of crowdfunding.
2. Upload your material
3. Wait to gather the desired amount.
4. Or you can simply donate.

Rewards crowdfunding

I think this is the best known case, surely you have ever seen Kickstarter videos, I recommend you watch some if you are not familiar with the subject. The idea is that this platform is the stepping stone for innovative and good quality products to come to market for the first time.

For each deposit a product is created and sent as a reward to the people they trusted.

How does it work?

1. A profile opens on the platform.
2. Launch a product, prototype or project.
3. Place the estimated amount to be reached or the target price.
4. Perform the production process.
5. The product or result is sent to each sponsor.
6. Or, you can only sponsor the project or product that catches your eye.

Crowdfunding Peer to Peer

Here are more financial profiles, such as loans between individuals, where the benefit can be varied: pay debts, pay for a trip, inject money into your business, etc.

The advantages of this way of requesting money is that the interest rates of a loan are low and as an investor (or who puts the funds for any project) you earn much more than anywhere else that offers you a return on your money. One company that is doing this in Mexico is La Tasa, being one of the best yields.

How does it work?

1. What your need is: get money or make money.
2. Invest or apply for your loan.
3. Wait for them to give you a personalized interest rate.
4. You will begin to have a statement of your investment or your loan.
5. You gain time and money.

Equity crowdfunding

It is a way to specifically finance projects that are starting or are about to be launched. The main idea is that investors who contribute capital receive a percentage of the company or startup. A well-known platform in Mexico is Play Business.

How does it work?

1. A profile opens on the platform.
2. Launch a product, prototype or project.
3. Place the estimated amount to be reached or the target price.
4. Or simply be an investor and select the project that catches your attention.

As you can see, crowdfunding has a range of possibilities for various types of objectives, but the following points must be taken into account.

Advantages of crowdfunding

• In some cases you can use social networks to boost your projects and thus impact a greater number of people.
• Platforms also have communities or groups on social networks.
• You may get feedback on your project or products, both good and bad, that will help you improve it.

Disadvantages of crowdfunding

• It is not only about uploading your video and that’s it, you should also think about other ways to have more exposure to reach the goal. And in the case of investments, you require patience because it takes time to see the fruits.
• It will always have a cost, it is not free. Each platform has a percentage of profit according to what is collected or the returns that are generated, they are usually very accessible rates.
• If you don’t know how to launch your campaign, it probably only reaches your family and friends.

Crowdfunding fees and amounts

Through debt crowdfunding, those interested in obtaining a loan can access financing ranging from 10,000 to 250,000 pesos. It is important to say that in this type of scheme, the interest rate is assigned in a personalized way, and is determined in relation to factors such as good credit history.

In this way, interest rates for loans through debt crowdfunding can range from 8 to 40 percent. The fee is defined in relation to the qualification obtained by each applicant. The better the rating, the better the rate.

Real estate crowdfunding

Crowdfunding has several aspects. Debt crowdfunding was cited above, however, there are at least three other categories, which are: donations, reward, and equity.

In that sense, it can be considered one more type, which is real estate crowdfunding. Like the other schemes, this is a type of collective financing, only that investors do not contribute money to lend to other people, but to promote projects to develop housing, for example.

In this way, those interested in launching a housing project, and who require financing, go to this type of scheme to receive resources. Thus, people can contribute money that will serve to start the construction of the project, and in return, they will receive some return.

Crowdfunding platforms

Thanks to the emergence of technology, there are currently at least a dozen crowdfunding platforms in Mexico. Not all serve the same niche, as some are platforms to lend money, others to participate as investors in specific projects, such as real estate; There are other options that are not for profit, and what they are looking for are resources to fund some social projects.

On the subject of debt crowdfunding, that is, collective financing for personal loans, there are platforms such as LaTasa.mx. This option offers those seeking financing, credit ranging from 20,000 to 350,000 pesos, with rates ranging from 9.9% to 28.9%, all in relation to the qualification obtained by each applicant.

Invest in crowdfunding?

Investing in crowdfunding is one of the most recommended decisions by experts today. According to specialists, this type of channels are ideal for people who have savings and seek to put money to work, in schemes with ample certainty.

Some experts have even pointed out that investing in crowdfunding gives better returns compared to other instruments.

Among the advantages that are listed to bet on this type of schemes are, in addition to the returns, the security with which it operates.