This is a guest blog post by Jilliene Helman, CEO of RealtyMogul. Don’t miss Jillien’s panel discussion:
? 12/08/2016 1:00 pm
Panel Discussion “Real Estate Crowdfunding”
I discovered something interesting about trailblazing movements when my team and I launched the real estate crowdfunding platform RealtyMogul.com: Sometimes a concept can be so different from everything that came before it, the most difficult part of moving it forward is getting people to fully understand it.
Case in point: Lending, particularly large-scale loans and business investments. As far back as we can remember, these services were always the exclusive domain of banks, mortgage companies, and other institutional investors. They involved mountains of paperwork and steep regulatory hurdles. And as an individual, unless you were fabulously wealthy, they didn’t involve you.
But as all of us attending the Crowd Invest Summit can attest, that old paradigm is being upended. Today, there are new models directly connecting individual lenders and investors with borrowers and businesses looking for capital. The trailblazing movements of crowdfunding and peer-to-peer (P2P) lending have, in just a few years, grown into multibillion-dollar industries.
Many borrowers and businesses remain wary of these new services, in no small part because they don’t fully understand them, or the differences between them — and therefore cannot determine which, if either, is right for their needs.
(For an interesting glimpse into just how new crowdfunding is as a concept, type it into a Word® doc. You’ll get the squiggly red underline indicating the software’s dictionary doesn’t yet recognize the term.)
If someone put you on the spot right now, could you clearly articulate the differences between crowdfunding and P2P lending? Most of us could not. So let me offer some clarity from the inside of this still-new fundraising paradigm.
The Differences Between Crowdfunding and P2P Lending
The primary difference from crowdfunding is that P2P lending is typically debt funding as opposed to equity investing.
Also, with most P2P platforms, the lending opportunities on offer for investors are often personal loans to borrowers — individuals, for example, seeking to consolidate high-interest credit card debt, finance home improvements or refinance a car loan. But some of these platforms, particularly the larger companies like Lending Club, also offer business loans (and lines of credit) and even patient financing solutions for doctors’ medical practices.
Whereas P2P lending is debt financing, the opportunities for investors on crowdfunding platforms are often equity investments — in our case, equity stakes in real estate ventures that entitle investors to participate in the endeavor’s upside potential. (Some crowdfunding platforms, including ours, also offer debt-financing options for borrowers who prefer to repay their funding in fixed installments rather than sell equity in their real estate projects.)
Another distinction between these types of platforms is that, in most cases, an investment in a P2P loan can be more liquid than an investment placed through a crowdfunding service. With real estate crowdfunding, for example, the investment can go into a physical property (or multiple properties), with investors receiving their returns after a hold period specified in the transaction. In a P2P loan, by contrast, lenders usually receive monthly cash flow as repayment for their debt investments.
So, Which is Safer?
Although there are too many variables to make any definitive, blanket statement about the relative safety of investing in crowdfunding versus that of P2P lending, a couple of points might help illuminate their respective risks for you.
First, although the P2P lending model offers investors the relative comfort of regular cash payments at a pre-determined rate of interest, these platforms also warn that the notes they issue are neither guaranteed nor insured — and that, as with any investment, lenders might lose some or all of the principal they’ve invested.
In other words, while P2P debt-financing loans do not give the lender any equity with which to participate in any profit, they still carry risks of loss of some or all of the investment.
Another vital factor in determining whether crowdfunding or P2P lending is safer can be the specific vetting methodology each individual company performs on would-be borrowers. Neither all crowdfunding platforms nor all P2P lending companies are created equal — and the sophistication and thoroughness of how these companies screen their personal and business borrowers can make all of the difference in whether or not an investment placed with them will be sound.
But whichever of these innovative investment platforms you prefer, I think it’s safe to say that these are exciting times for investors and borrowers. After all, in this 900-word article about lending, I’ve used the word “banks” only once — and that was only to mention how they’re are being circumvented by borrowers.