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Is the “crowdfunding” bubble about to burst

Whilst some people are still trying to understand what “crowdfunding” actually is, and others consider whether it will one day take over from the mainstream lenders for cash flow needs, for some investors it seems that the decision to enter in to crowdfunding may not have been the right one.  Last week it was announced that the UK’s first buy-to-let investment trust was looking to close down and was seeking liquidation.  So could this mean a reduction in the number of business finance solutions in the future?

Peer-to-peer lending platforms such as Funding Circle, Rate Setter and Zopa allow savers to lend money to individuals or businesses at a rate they choose, cutting out the middle man of the bank or building society.

With any investment, crowd funding does not come without its risks.  For the investors these risks need to be weighed up against the likely returns.  With interest rates at record lows for a record time, return on mainstream investments is low.  Therefore risks have to be taken to try to get a return.  What investors need to consider though is when the risks become too high.  For those that have invested in the Buy-to-Let company, their investment will be treated as equity and therefore only paid after all other creditors have been paid in full.  How though can you avoid investing in a company which ultimately ends up in administration or liquidation?

To be honest, if I could tell you that answer I would not be doing the work I do, and instead would be a very rich investment banker.  In truth there is no way to eliminate the risk, only reducing it.  Investors should look at the previous trading history of the company and whether it has bee subject to any insolvency proceedings in the past.  They should research fully the background of the company and its assets.  That said, that does not guarantee that something will not happen in the future.

Britain’s peer-to-peer lending sector enjoyed a record quarter. Figures from the Peer-to-Peer Finance Association showed that the eight largest lending platforms arranged £507 million of loans to consumers and small firms in the three months to the end of June.

Total lending by the industry has now reached £3.15 billion, it said.

In the early 2000’s the property market was the place to invest, resulting in a bubble which eventually burst.  Without proper monitoring and regulation, there is a risk that the “Crowdfunding” market could do the same.

So why has the market increased in the way it has?  Since the financial crash of 2008 many small firms have complained that banks are making it very difficult to get finance due to the caution they are exercising.  Companies are therefore going elsewhere, and paying higher rates to be able to get the funding they need.

Whilst Crowdfunding is one avenue to explore, other finance is still available, such as asset based lending or factoring.  For all involved there needs to be a weigh up between the risk and return for the investor, and the rates being quoted for the lender.  With proper regulation these alternative cash flow solutions should enable the economy to keep growing and allow companies to grow and succeed.

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