You’ve probably heard of crowdfunding. Crowdfunding is an oft-discussed topic among elfin members. But what is it? And how can you invest yourself through crowdfunding? Crowdfunding for charities (donations) or startups is familiar to almost everyone, but crowdfunding as a form of investment is still unknown to many. In this article, we will inform you about the serious investment option that is crowdfunding or crowdfinance. We also explain why, in our view, this can be a great form of investment to diversify your investments with.

This article was written in collaboration with Collin Crowdfund. And we keep repeating it: investing, even in crowdfunding, involves risk! Read carefully and never invest with money you can’t afford to lose. Promise?

What is crowdfunding?

The word actually says it all: the crowd (
a large group of people
) together provides the financial resources needed to fund a business. This could be funding for a charity or social cause, the start-up of a new business (startup) but also the financing of established entrepreneurs. The latter option appears to be least known to the general public while it can be the most interesting form of investment.

How does crowdfunding work?

The Netherlands has several dozen crowdfunding platforms, about a dozen of which deal with business loans. Despite differing from each other in a few details, they are very similar in the basics. An entrepreneur submits a financing application to the platform, the platform reviews this application on various aspects and when this application is approved by the respective platform, it is posted on the platform. Then affiliated investors can view and review the application after which they can choose to invest in it. When sufficient funding is raised, the platform transfers the money to the company. The company then pays interest and principal each month which is returned to your account monthly through the platform until the investment is fully repaid with the pre-agreed interest rate. This interest rate usually varies between 5.0% and 10% per year in the Netherlands.

Under Dutch law, an application must be publicly available at least 48 hours before it can be invested. This way, you have enough time to make an informed choice or possibly do some research on the company yourself.

Crowdfunding in the Netherlands

Despite the fact that most Dutch people associate crowdfunding with charities and start-ups, the opposite is true. Over the year 2021, more than €730 million has been funded through crowdfunding in the Netherlands. Of that, only €28.5 million went to charities and over €651 million was provided as business credit. That such a small part of the industry has so much name recognition is, of course, explainable. Raising money for a good cause often has more news value than raising money to complete yet another real estate project. It is unfortunate that this relatively young form of investment is still so unknown to many. Because let’s face it, compared to a form of investment like stocks, in which the Dutch invested over €159 billion in the second quarter of 2022, crowdfunding is of course still small. But certainly no less interesting. We show you what can make investing through crowdfunding so interesting.

Crowdfunding as an investment option

So it is a serious form of investment that is still relatively small and unexposed. But what is interesting about crowdfunding? And what are the advantages of this form of investment over other forms of investment?

As mentioned earlier, there are a dozen crowdfunding platforms operating in the Netherlands that offer crowdfunding as a form of investment. We like to call this one a crowdfinance platform, to indicate the difference between donations and investments. First, it is important that the crowdfunding platform has an exemption from the AFM and is affiliated with Branchevereniging Nederland Crowdfunding. This way, you start with a reliable platform.

Crowdfinance has four potential advantages over other forms of investment:

1. Additional spread

First, it is an additional form of investment that can be used to widen the spread between investment forms such as real estate, precious metals, stocks and/or cryptocurrencies. More diversification in your investment portfolio provides more stability within your investment portfolio. For example, in many cases a crash in the stock market leads to a rise in precious metals, which can offset your loss in the stock market. With the addition of a form of investment such as crowdfinance, you may be strengthening the stability of your investment portfolio. And that crowdfinance can be a stable form of investment, we tell you in the next paragraph.

2. Stability

The crowdfinance industry is seen as stable for several reasons. First, this form of investment has demonstrably stable returns over the past few years. Interest rates for crowdfinance projects in the Netherlands range from 5.0% to 10%. The average interest rate of crowdfinance platform Collin Crowdfund last year was 7.32%. Here, investors kept an average of 5.91% net return.

In doing so, the year 2022 was not the quietest year in history economically. For example, stock markets have fallen sharply, but the average crowdfunding investor has noticed little of that. Her returns remained stable. The year before in 2021, her return was 5.92% and the year before in 2020 was 5.89%. You won’t have outliers of 20% gains, but you won’t have fat losses either when you spread your investments well.

Investing through crowdfinance can potentially give your entire investment portfolio more stability and absorb declines in other markets.

3. Collateral

In addition to extra spread and stability, a good investment also has securities. For example, many loans involve real estate as collateral. If, for whatever reason, the company is unable to repay the loan, the collateral that has been contributed is called upon. In a large proportion of payment problems, foreclosure* of collateral leads (in part) to repayment of the outstanding loan amount. Of course, this does depend on the value of the collateral, and the extraction process is not settled within a day.

*Suppose a business owner can no longer meet his payment obligation, but when he took out the loan he placed his business premises as security. Then this security can be extracted for the benefit of investors. In this way, investors often end up getting a large portion of their investment back.

If a lot of collateral is put in, then you often receive less interest as well. As a result, your investment is more likely to be repaid in full, and so there is justifiably less interest in return. Loans where less collateral is brought in often have higher interest rates, as there is more risk for the investor in case of payment problems. But whether many or few securities are brought in, you don’t have these securities with a form of investment such as stocks.

4. Additional dimension

Finally, crowdfinance is also a nice form of investment because it can be an additional addition to your investment portfolio. For example, if you have been investing through crowdfinance for a while and you walk through your hometown, you may have invested in the remodeling of the local bakery or the expansion of a restaurant in your neighborhood. Often people like the fact that they have been able to do their bit for local/Netherlands SMEs and they can get a nice return from it. Crowdfinance thus offers an additional element that other forms of investment do not have or have less of.

Intended return

We have just mentioned that crowdfinance can be a stable form of investment. This means that with interest rates between 5.0% and 10.0%, annual returns can never exceed the interest rates paid by entrepreneurs. So certainly don’t compare it to a form of investment like stocks where an annual return in a good year of 20% is not crazy at all. But these movements also take place downward. And that, when you invest spread through crowdfinance, is unlikely. Therefore, crowdfunding can be a great addition in your investments.