Crowdfunding is about lending money via a specialist website that brings together lenders and borrowers, without the need for a bank.
Crowdfunding takes a number of forms, but in essence it is about one person lending money to another person, group of people, or a business. This is done via a specialist website, or “platform”, that brings together lenders and borrowers, acting as matchmaker and then manager of the loan.
This new financial service does a lot of what banks do, in that they accept your cash, lend this money on to borrowers, and give you some of the interest on that loan. But P2P lending can offer both lenders and borrowers a much better deal, as they take a much smaller cut on the interest rate than a traditional bank does. So the borrower pays a smaller fee for the loan, and you, the lender, receives a higher interest rate.
There are higher risks involved with using P2P lending than depositing money in a bank. Because the loan is between you and the borrower(s), if a borrower can’t pay back their loan, you could lose some of the money you lent out. Some P2P platforms do offer protection against this risk, such as a safeguarding fund. Given the potential for reputational loss, most P2P platforms work hard to minimise borrowers defaulting on their loans.
Unlike banks, P2P platforms are not covered by the Financial Services Compensation Scheme (in which the government protects £85,000 of your bank deposit). However, If a P2P platform goes bust, most have the provision that another firm will take over the management of your loan and make payment back to you as normal.
By cutting out the banks, borrowers and lenders can get a much better deal – but P2P platforms can also give you much more control over what you choose to support. This transparency and flexibility allows you to spread your money around, supporting businesses and individuals that you believe in, whilst making a better return on your money than you would in a bank or savings account.