What are the pros and cons of crowdfunding?
In this article, we shared with you why we find crowdfunding, or crowdfinance, interesting as an investment option. But what are the advantages and disadvantages of crowdfunding over other forms of investment? And: is it actually something for you, investing in crowdfunding? Read along quickly!
This campaign is a paid partnership with Collin Crowdfund. They are paying elfin to work with us to create content for our community. Our common goal is for women to make an informed assessment of whether crowdfunding is an option for them. Always do your own research well and invest only with a party that feels right for you. Also, don’t invest with money you can’t afford to lose.
Briefly, 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 can be financing for a charity or social cause, the start-up of a new business(startup), as well as financing established entrepreneurs.
What are the pros and cons of crowdfunding?
We will now cover the pros and cons of crowdfunding. Crowdfunding certainly offers interesting opportunities. But even within the world of crowdfunding, you have more and less risky projects. For example, if you invest in a start-up with no collateral, you are more at risk than if you invest in a project of an entrepreneur who already has a running business and wants to open a new branch. This article was written in conjunction with Collin Crowdfund. We find this an interesting party because the projects they offer are almost all collateralized by collateral. Read along quickly and find out the ins & outs.
The benefits of crowdfunding
You have to put the benefits of crowdfunding in light of other forms of investment, such as stocks or real estate. With crowdfunding, you have roughly four benefits that are interesting to explore:
- Additional spread
- Stability
- Collateral
- Extra dimension
1. Additional spread
In addition to investing in stocks, ETFs and real estate, crowdfunding can be an additional addition to a well-diversified investment portfolio. And diversification is important because that’s how you minimize risk. Read more about spreading your investments here.
2. Stability
Interest rates for crowdfinance projects in the Netherlands range from 5.0% to 10%. At Collin Crowdfund, investors achieved these returns: 5.91% over 2022, 5.92% over 2021 and 5.89% in 2020. Not bad! Especially considering that these were not the quietest years of the global economy. With a good spread, you can achieve similar returns fairly easily.
Psst: did you know that investing in ETFs can also give you good returns? Read more about ETF investing here!
3. Collateral
In addition to extra spread and stability, you would prefer to have some securities. For example, many projects, in this case at Collin Crowdfund, bring in real estate as collateral. If, for any reason, the company can no longer repay the loan, the collateral that has been contributed is called upon.
4. Additional dimension
Surely a nice benefit of crowdfunding is the extra dimension and impact you can make with your investment. Local entrepreneurs in your area can make their entrepreneurial dreams come true with your investment. That’s cool! You can also very deliberately choose, for example, businesses that need financing for sustainability. The extra dimension and impact you can make with your investments and the direction you have over them is great. And you can get a nice return on that, too. Win win win!
Collin Crowdfund
When you invest with a platform like Collin Crowdfund, you can rest assured that you are doing business with a solid party. Collin, like a number of other platforms in the Netherlands, has an exemption and, as of the end of 2023, a license from the AFM (Authority for the Financial Markets). As a result, Collin meets a whole host of requirements that offer you protection as an investor.
Note! There are also platforms operating without an exemption/license. These often have the following message at the top of their website:
The AFM’s register of crowdfunding platforms shows which parties have an exemption.
The disadvantages of crowdfunding
Look, ladies. There is no such thing as a free lunch. Every investment comes with risks. That’s just the way it is. By the way, read more about investment risk here. But you can minimize the risks by, for example, properly diversifying your investments and not acting on emotion. Looking specifically at crowdfunding, we see the following drawbacks:
Not always being able to just invest
Crowdfunding is still relatively young and there are many interested investors. Consequently, it sometimes happens that an investment opportunity fills up just in front of you or at times there is no investment opportunity available. You don’t have that disadvantage with stocks or crypto, for example, where investments can be made almost 24/7. Missed opportunities, in other words.
Not to withdraw money at will
Before you invest in crowdfunding, it is important to know that you cannot withdraw or sell your investment in the interim. Are you investing in a business with a 5-year repayment period? Then you will receive monthly interest and repayments until after 5 years your investment is fully repaid. So your investment is not withdrawable earlier.
So don’t invest with money you need before or what you can’t afford to lose. Incidentally, this disadvantage also leads to the calmness and stability of this form of investment and thus can also be seen as an advantage. Every advantage has its disadvantage, say.
Relatively lower returns than other forms of investment
Every advantage has its disadvantage. So are the stable returns of crowdfinance. This is partly because the interest rate for crowdfinance projects in the Netherlands is almost always between 5.0% and 10.0%. Outliers of 20% or 30% are therefore excluded. This can be called a disadvantage compared to other forms of investment where these types of opportunities can be achieved. But the chances of declines of that magnitude are certainly present in the other forms of investment as well.
Conclusion pros and cons of crowdfunding?
What are the pros and cons of crowdfunding? You see, every form of investment has its pros and cons. Also crowdfinance. It turns out that no one form of investment is the ideal form of investment. This is precisely why diversification among different forms of investment is smart. Crowdfinance is a nice and relatively new form of investment that you can add to your investment portfolio. To create more stability and make an impact with your investments in Dutch SMEs.
Listen below to the podcast that Elfin’s Lieke recorded with Audrey Franssen of Collin Crowdfund.
