Crowdfunding, something I’m sure you’ve seen passed by and probably participated in. Not? Did you know that there are very fun and interesting crowdfunding projects? Even projects that fit into your journey to FIRE. We answer the question; Crowdfunding, what is it and how does it work?
What is crowdfunding anyway?
The word actually says it a bit. A large group of investors (crowd) invests or lends an amount of money (funding) to individuals or businesses. This is usually done through a crowdfunding platform.
Forms of crowdfunding
We break down crowdfunding into 5 categories, the last two of which may be particularly interesting in your journey to FIRE:
- Donate
- Sponsorship
- Reward-based funding
- Loan-based funding
- Equity based funding
Donate
No more or less than donating money to a cause. You thereby financially support the initiative of your choice, without expecting anything in return. Examples include giving money to the World Wildlife Fund or the KWF cancer charity.
Sponsorship
Again, there is no financial consideration in return. For example, sponsoring a running race or soccer club. Usually this is done for marketing reasons such as increasing brand awareness.
Reward-based funding
With reward-based funding, as with sponsorship, you also support a project, only there is a (financial) consideration in return.
Loan-based funding
Here’s where it gets interesting. In fact, in this type of crowdfunding, you are going to lend money to individuals or businesses with interest in return as a reward. So this is where financial returns come into play. Platforms that offer this type of crowdfunding and are definitely worth checking out are:
- PeerBerry* On this platform, you can choose who you lend money to. This can be as little as €15. These are personal loans and real estate projects. The maturities range from short to long term and the return is usually around 10%.
- Mozzeno This platform is similar to PeerBerry. Entry here starts with an account into which you need to deposit a minimum of €500. However, Mozzeno does perform a kind of risk analysis for you, which as an investor can give you a safe feeling. You also get to decide where and in what size (of that €500) you put your deposited money, so this can be as little as €25. They offer investment projects and loans in various risk classes (A to D) with returns increasing as the maturity becomes longer and risk class lower. These include gross yields of 2-2.5% in Class A (fully protected) to 4.5-5% in Class D.
- Mintos. This platform works with strategies that fit your risk tolerance: diversified, conservative, or high-yield. You put money in here and based on your chosen risk profile, loans or parts of loans are purchased. The return you then earn is reinvested in new (parts of) loans. With that said, you can indicate that you want to stop at any time, so you always have access to your money. Returns vary by profile from 8.8-9.4%. By the way, Mintos also offers a strategy where you can choose your own loans. This gives you a little more freedom with the money you put in but can also give you more risk. Returns here range from 6-21%
- Reinvest24* Investing in real estate through crowdfunding. You open an account where you deposit money and can then immediately start investing in real estate projects, at any amount you want (can be as little as €100). When the total required crowdfunding amount is raised, the real estate project starts and, depending on the conditions, your return accrual already begins immediately. They offer project where you receive returns per month and receive your deposited money back at the end of the term, but also offer projects where you can generate rental income.
*This platform is currently being tried out by a lady in the FIRE community. Harsh statements about reliability we dare not make yet but we’ll keep you updated!
Equity based financing
Investing in a company, promising dividends and appreciation in the value of the stock or bonds, for example. Return on investment is one of the main drivers here. Examples of this type of crowdfunding are startups where you invest money in, in exchange for a percentage share of the company. You may also know this from the TV show “Dragons den.
Conclusion
If you have become interested in expanding your FIRE adventure with a form of crowdfunding, make sure that whatever option you choose, you also do your own thorough research on risk and reliability first. Crowdfunding can be a very nice way to support smaller and, for example, sustainable initiatives, but there can also be more risk involved. A man forewarned…
